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                         REPORT OF INVESTIGATION
 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
            OFFICE OF INSPECTOR GENERAL


                                       Case No. OIG-526


              Investigation of the SEC’s Response to Concerns
          Regarding Robert Allen Stanford’s Alleged Ponzi Scheme


                                         March 31, 2010
       REDACTION KEY

AC = Attorney-Client Privilege

DPP = Deliberative Process Privilege

LE = Law Enforcement Privilege

PII = Personal Identifying Information

PP = Personal Privacy

WP = Attorney Work Product
This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before
disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.



                                         Report of Investigation

                      Investigation of the SEC’s Response to Concerns
                  Regarding Robert Allen Stanford’s Alleged Ponzi Scheme

                                               Case No. OIG-526


                                              Table of Contents

INTRODUCTION AND BACKGROUND ....................................................................... 1 

SCOPE OF THE OIG INVESTIGATION ......................................................................... 2 

    I.      E-MAIL SEARCHES AND REVIEW OF E-MAILS......................................... 2 

    II.     DOCUMENT REQUESTS AND REVIEW OF RECORDS.............................. 3 

    III.  TESTIMONY AND INTERVIEWS ................................................................... 4 

RELEVANT STATUTES, RULES AND REGULATIONS ........................................... 10 

EXECUTIVE SUMMARY .............................................................................................. 16 

RESULTS OF THE INVESTIGATION .......................................................................... 29 

    I.      IN 1997, THE FWDO EXAMINATION STAFF REVIEWED
            STANFORD’S BROKER-DEALER OPERATIONS AND
            MADE A REFERRAL TO ENFORCEMENT DUE TO A
            CONCERN THAT ITS SALES OF CDs CONSTITUTED A
            PONZI SCHEME............................................................................................... 29 

            A.     Two Years After Stanford Group Company Began
                   Operations, the SEC Identified It as a Risk and a Target For
                   an Examination Based on Suspicions That Its CD Sales
                   Were Fraudulent........................................................................................ 29 

            B.     After Conducting a Short Examination, the Examination
                   Staff Concluded That Stanford Was Probably Operating a
                   Ponzi Scheme............................................................................................ 30 

            C.     As a Result of Their Concerns That Stanford Was
                   Operating a Ponzi Scheme, the Examination Staff Referred
                   Their Stanford Findings to the Enforcement Staff.................................... 33 
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    II.    EIGHT MONTHS AFTER THE EXAMINATION STAFF
           REFERRED STANFORD, THE ENFORCEMENT STAFF
           OPENED, AND QUICKLY CLOSED, A MATTER UNDER
           INQUIRY........................................................................................................... 34 

           A.      The 1998 Stanford MUI Was Likely Not Even Opened in
                   Response to the Examination Staff’s Referral, But in
                   Response to a Concern From the U.S. Customs Department
                   That Stanford Was Laundering Money..................................................... 34 

           B.      After Stanford Refused to Produce Documents, No Further
                   Investigative Steps Were Taken................................................................ 36 

           C.      The Enforcement Staff Closed the 1998 Stanford MUI
                   Three Months After It Was Opened.......................................................... 37 

                   1.      The Enforcement Staff Told the Examination Staff
                           That an Investigation of Stanford Was Not Warranted
                           Because of the Lack of U.S. Investors..............................................38 

                   2.      The Enforcement Staff Told the Examination Staff
                           That an Investigation of Stanford Would Be Too
                           Difficult Because of the Staff’s Inability to Obtain
                           Records From Antigua......................................................................39 

                   3.      SGC’s Outside Counsel, a Former Head Of The
                           SEC’s Fort Worth Office, May Have Assured
                           Barasch That “There Was Nothing There”.......................................40 

    III.  IN 1998, THE FWDO EXAMINATION STAFF EXAMINED
          SGC’S INVESTMENT ADVISER OPERATIONS AND
          REACHED THE SAME CONCLUSION AS THE BROKER-
          DEALER EXAMINERS: STANFORD’S CD SALES WERE
          PROBABLY FRAUDULENT........................................................................... 42 

           A.      The 1998 Examination Concluded That SGC’s Sales of SIB
                   CDs Were Not Consistent With SGC’s Fiduciary
                   Obligation to Its Clients Under the Investment Advisers
                   Act............................................................................................................. 44 

           B.      The Enforcement Staff Failed to Consider the Investment
                   Adviser Examiners’ Concerns in Deciding Not to
                   Investigate Stanford Further ..................................................................... 46 




                                                                ii
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    IV.  IN 2002, THE SEC EXAMINERS EXAMINED SGC’S
         INVESTMENT ADVISER OPERATIONS AGAIN AND
         REFERRED STANFORD TO ENFORCEMENT ............................................ 47 

           A.      In the 2002 Examination, the Examiners Found That
                   Stanford’s CD Sales Had Increased Significantly, Which
                   Led to Concerns That the Potential Ponzi Scheme Was
                   Growing .................................................................................................... 47 

           B.      The 2002 Examination Found That SGC Was Violating the
                   Investment Advisers Act By Failing to Conduct Any Due
                   Diligence Related to the SIB CDs ............................................................ 50 

           C.      During the 2002 Examination, the FWDO Enforcement
                   Staff Received a Letter From the Daughter of an Elderly
                   Stanford Investor Concerned That the Stanford CDs Were
                   Fraudulent ................................................................................................. 53 
                                                                          Complainant 1
           D.      The FWDO Did Not Respond to the            Letter and
                   Did Not Take Any Action to Investigate Her Claims............................... 55 
                                                                                             Complainant 1
           E.   Although a Decision Was Made to Forward the
                Letter to the Texas State Securities Board, the Letter Was
                Never Forwarded ...................................................................................... 56 

           F.      In December 2002, the Examination Staff Referred Their
                   Stanford Findings to the Enforcement Staff ............................................. 56 
                                                                                          Complainant 1
           G.      Based on the Earlier Decision to Forward the
                   Letter to the TSSB, the “Matter” Was Considered Referred
                   to the TSSB Even Before the 2002 Examination Report
                   Was Sent to Enforcement.......................................................................... 57 

           H.      The Enforcement Staff Did Not Open an Inquiry Into
                   Stanford and Did Not Even Review the 2002 Examination
                   Report........................................................................................................ 58 

           I.      The Enforcement Staff Did Not Refer the 2002
                   Examination Report Findings to the TSSB............................................... 59 

           J.      In December 2002, the SEC Examination Staff Attempted
                   to Interest the Federal Reserve in Investigating Stanford,
                   But Concluded That the Federal Reserve Had DPP
                 DPP
                            of Stanford ................................................................................... 60 



                                                              iii
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    V.     IN 2003, THE SEC ENFORCEMENT STAFF RECEIVED
           TWO COMPLAINTS THAT STANFORD WAS A PONZI
           SCHEME, BUT NOTHING WAS DONE TO PURSUE THOSE
           COMPLAINTS .................................................................................................. 63 
                  Confidential Source
           A.                   in a Ponzi Scheme Case Filed By the SEC
                   Noted Several Similarities Between That Case and
                   Stanford’s Operations ............................................................................... 63 

           B.      An Anonymous Insider Warned That Stanford Was
                   Operating “a Massive Ponzi Scheme” ...................................................... 65 

    VI.  IN OCTOBER 2004, THE EXAMINATION STAFF
         CONDUCTED A FOURTH EXAMINATION OF SGC IN
         ORDER TO REFER STANFORD TO THE ENFORCEMENT
         STAFF AGAIN.................................................................................................. 70 

           A.      The Examination Staff Was Alarmed at the Increasing Size
                   of the Apparent Ponzi Scheme, and Accordingly, Made
                   Another Enforcement Referral of Stanford a “Very High
                   Priority”..................................................................................................... 70 

           B.      The 2004 Examination Report Concluded That the SIB
                   CDs Were Securities and Were Part of a “Very Large Ponzi
                   Scheme” .................................................................................................... 72 

           C.      The Examination Staff Conducted Significant Investigative
                   Work During the Six Months From October 2004 Through
                   March 2005 to Bolster Its Anticipated Enforcement
                   Referral ..................................................................................................... 74 

           D.      In March 2005, Barasch and Degenhardt Learned of the
                   Examination Staff’s Work on Stanford and Told Them That
                   it Was Not a Matter That Enforcement Would Pursue ............................. 79 

    VII.  IN APRIL 2005, IMMEDIATELY AFTER BARASCH LEFT
          THE SEC, THE EXAMINATION STAFF REFERRED
          STANFORD TO ENFORCEMENT.................................................................. 80 

           A.      The Enforcement Staff Initially Reacted Enthusiastically to
                   the Referral and Opened a MUI................................................................ 83 

           B.      By June 2005, the Enforcement Staff Had Decided to Refer
                   the Matter to the NASD, Apparently as a Precursor to
                   Closing the Matter..................................................................................... 86 


                                                              iv
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           C.     In September 2005, the Enforcement Staff Decided to
                  Close the Stanford Investigation, But the Examination Staff
                  Fought to Keep the Matter Open .............................................................. 90 

           D.     In November 2005, the Head of the FWDO Enforcement
                  Group Overruled Her Staff’s Objections to Continuing the
                  Stanford Investigation and Decided to Seek a Formal Order
                  in Furtherance of That Investigation......................................................... 95 

    VIII.  THE ENFORCEMENT STAFF REJECTED THE
           POSSIBILITY OF FILING AN “EMERGENCY ACTION”
           AGAINST SIB BASED ON CIRCUMSTANTIAL EVIDENCE
           THAT IT WAS OPERATING A PONZI SCHEME......................................... 98 

    IX.  THE ENFORCEMENT STAFF REJECTED THE
         POSSIBILITY OF FILING AN ACTION AGAINST SGC’S
         BROKER-DEALER FOR VARIOUS VIOLATIONS OF THE
         FEDERAL SECURITIES LAWS.................................................................... 103 

    X.     THE ENFORCEMENT STAFF DID NOT CONSIDER FILING
           AN ACTION UNDER THE INVESTMENT ADVISERS ACT
           THAT COULD HAVE POTENTIALLY SHUT DOWN SGC’S
           SALES OF THE SIB CDs ............................................................................... 109 

           A.     The Issue of Whether the Stanford CDs Were Securities
                  Was Irrelevant to an Action Against SGC For Violations of
                  the Anti-Fraud Provisions of the Investment Advisers Act .................... 110 

           B.     The Enforcement Staff Did Not Consider Filing a Section
                  206 Case or Conducting a Section 206 Investigation ............................. 112 

                  1.     The 2005 Referral Did Not Mention Section 206...........................112 

                  2.     Neither Cohen’s nor Preuitt’s November 2005
                         Memorandum Discussed a Section 206 Violation..........................113 

                  3.     When the FWDO Staff Met With Addleman, She
                         Was Unaware That SGC Was an Investment Adviser ...................114 

           C.     The Enforcement Staff Could Have Filed a Section 206 Case
                  With the Potential For Shutting Down SGC’s Sales of the
                  SIB CDs and/or Discovering Evidence of the Ponzi Scheme................. 115 

    XI.  HAD THE SEC FILED AN ACTION EARLIER,
         SIGNIFICANT INVESTOR LOSSES COULD POTENTIALLY
         HAVE BEEN AVOIDED................................................................................ 118 

                                                        v
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     XII.  THE SEC ENFORCEMENT STAFF’S FAILURE TO BRING
           AN ACTION AGAINST STANFORD EARLIER WAS DUE,
           IN PART, TO THE STAFF’S PERCEPTION THAT THE
           CASE WAS DIFFICULT, NOVEL, AND NOT THE TYPE OF
           CASE FAVORED BY THE COMMISSION.................................................. 121 

             A.     Senior Enforcement Management Emphasized the Need
                    For “Stats”............................................................................................... 121 

             B.     The Pressure For “Stats” May Have Discouraged the Staff
                    From Pursuing Difficult Cases ............................................................... 124 

             C.     Ponzi Scheme Cases Were Disfavored by Senior
                    Enforcement Officials............................................................................. 128 

             D.     The SEC Bureaucracy May Have Discouraged the Staff
                    From Pursuing Novel Legal Cases ......................................................... 129 

     XIII.  AFTER LEAVING THE SEC, BARASCH SOUGHT TO
            REPRESENT STANFORD IN CONNECTION WITH THE
            SEC INVESTIGATION ON THREE SEPARATE OCCASIONS
            AND DID REPRESENT STANFORD FOR A LIMITED
            PERIOD OF TIME .......................................................................................... 131 

             A.     In June 2005, Two Months After Leaving the SEC, Barasch
                    Sought to Represent Stanford and Was Advised He Could
                    Not Do So ............................................................................................... 131 

             B.     In September 2006, Stanford Retained Barasch to
                    Represent it in Connection With the SEC’s Investigation of
                    Stanford, and Barasch Performed Legal Work on Behalf of
                    Stanford................................................................................................... 137 

             C.     In Late November 2006, After He Had Already Performed
                    Legal Work on Stanford’s Behalf, Barasch For the Second
                    Time Sought SEC Approval to Represent Stanford and Was
                    Again Told He Could Not Do So............................................................ 142 

             D.     Immediately After the SEC Sued Stanford on February 17,
                    2009, Barasch Again Sought to Represent Stanford, This
                    Time in the Litigation ............................................................................. 145 

CONCLUSION............................................................................................................... 149 




                                                               vi
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                           INTRODUCTION AND BACKGROUND

        On February 17, 2009, the Securities and Exchange Commission (“SEC” or
“Commission”) filed an action in the U.S. District Court for the Northern District of
Texas alleging that Robert Allen Stanford and his companies (collectively, hereinafter,
referred to as “Stanford”) orchestrated an $8 billion fraud based on false promises of
guaranteed returns related to certificates of deposit (“CDs”) issued by the Antiguan-based
Stanford International Bank (“SIB”). The SEC’s Complaint alleged that SIB sold
approximately $8 billion of CDs to investors by promising returns that were “improbable,
if not impossible.” Complaint, SEC v. Stanford International Bank, Ltd., et al., Case No.
3-09CV0298-L (N.D. Tex. filed February 17, 2009), attached as Exhibit 1, at ¶ 30.
Pursuant to the SEC’s request for emergency relief, the Court immediately issued a
temporary restraining order, froze the defendants’ assets, and appointed a receiver to
marshal those assets. 1 After reviewing documents obtained from the court-appointed
receiver, the SEC filed an amended complaint on February 27, 2009, further alleging that
Stanford was conducting a Ponzi scheme. 2

        Shortly after the SEC filed its action against Stanford, the SEC’s Office of
Inspector General (“OIG”) received several complaints alleging that the SEC’s Fort
Worth District Office (“FWDO”) 3 had not diligently pursued its investigation of Stanford
until the Madoff Ponzi scheme collapsed in December 2008. The complaints also
criticized the SEC for “standing down” from its investigation at some point in response to
a request from another federal law enforcement entity.

      The OIG investigated those specific allegations and issued a report on June 19,
2009. See Report of Investigation (“ROI”), Case No. OIG-516, entitled, “Investigation of
Fort Worth Regional Office’s Conduct of the Stanford Investigation.” 4 The OIG


1
     See Temporary Restraining Order, Order Freezing Assets, Order Requiring An Accounting, Order
Requiring Preservation of Documents, and Order Authorizing Expedited Discovery, SEC v. Stanford
International Bank, Ltd., et al., Case No. 3-09CV0298-L (N.D. Tex. filed February 17, 2009), attached as
Exhibit 2; Order Appointing Receiver, SEC v. Stanford International Bank, Ltd., et al., Case No. 3-
09CV0298-L (N.D. Tex. filed February 17, 2009), attached as Exhibit 3.
2
    See First Amended Complaint, SEC v. Stanford International Bank, Ltd., et al., Case No. 3-09CV0298-
L (N.D. Tex. filed February 27, 2009), attached as Exhibit 4.
3
     The Fort Worth office of the SEC was elevated to a Regional Office on April 2, 2007. Since then, the
Fort Worth office has reported directly to the SEC’s Headquarters Office in Washington, DC. Prior to
April 2007, the Fort Worth office was a District Office that reported to the SEC’s Central Regional Office
in Denver.
4
    The OIG investigation found that the FWDO staff had investigated Stanford before the December 2008
revelations about Madoff’s Ponzi scheme, but that its efforts to pursue its suspicions of a Ponzi scheme had
been hampered by: 1) a lack of cooperation on the part of Stanford and his counsel; 2) certain jurisdictional
obstacles; and 3) according to a U.S. Department of Justice (“DOJ”) indictment, criminal obstruction of the
FWDO’s Stanford investigation by several individuals including the head of Antigua’s Financial Services
Regulatory Commission. See Report of Investigation, Case No. OIG-516, entitled “Investigation of Fort
         (Footnote continued on next page.)
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received a letter, dated October 9, 2009, from the Honorable David Vitter, United States
Senate, and the Honorable Richard Shelby, United States Senate, requesting “a more
comprehensive and complete investigation of the handling of the investigation into
Robert Allen Stanford and his various companies.…” The letter specifically requested
that the OIG review, inter alia, the “history of all of the SEC’s investigations and
examinations (conducted either by the Division of Enforcement or by the Office of
Compliance Inspections and Examinations) regarding Stanford.” Accordingly, the OIG
opened this investigation on October 13, 2009. This investigation focused on any
indications that the SEC had received prior to 2006 that Stanford was operating a Ponzi
scheme or other similar fraud and what actions, if any, the SEC took in response.


                           SCOPE OF THE OIG INVESTIGATION


I.       E-MAIL SEARCHES AND REVIEW OF E-MAILS

        Between October 13, 2009, and February 16, 2010, the OIG made numerous
requests to the SEC’s Office of Information Technology (“OIT”) for the e-mails of
current and former SEC employees for various periods of time pertinent to the
investigation. The e-mails were received, loaded onto computers with specialized search
tools and searched on a continuous basis throughout the course of the investigation.

        In all, the OIG received from OIT e-mails for a total of 42 current and former
SEC employees for various time periods pertinent to the investigation, ranging from 1997
to 2009. These included: 35 current or former FWDO employees, two current or former
Headquarters Office of Compliance Inspections and Examinations (“OCIE”) employees,
two current or former Headquarters Division of Trading and Markets employees, one
current Headquarters Division of Enforcement (“Enforcement”) employee, one current
Headquarters Ethics Office employee, and one former Office of Economic Analysis
(“OEA”) employee. The OIG estimates that it obtained and searched over 2.7 million
e-mails during the course of its investigation.




Worth Regional Office’s Conduct of the Stanford Investigation.” at http://www.sec.gov/foia/docs/oig-516-
redacted.pdf.
     The OIG investigation also found that in April 2008, the FWDO staff had referred its suspicion that
Stanford was operating a Ponzi scheme to DOJ, and that subsequently, the FWDO staff, at DOJ’s request,
had effectively halted its Stanford investigation. Id. Immediately after the revelations of the Madoff Ponzi
scheme became public in December 2008, the Stanford investigation had become more urgent for the
FWDO staff and, after ascertaining that the DOJ investigation was in its preliminary phase, the FWDO
staff had moved forward with its Stanford investigation. Id.


                                                     2
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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
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II.     DOCUMENT REQUESTS AND REVIEW OF RECORDS

       On October 27, 2009, the OIG sent comprehensive document requests to both
Enforcement and OCIE, specifying the documents and records we required to be
produced for the investigation. The OIG had numerous e-mail and telephonic
communications with Enforcement and OCIE regarding the scope and timing of the
document requests and responses, as well as meetings to clarify and expand the document
requests, as necessary.

        We carefully reviewed and analyzed the information received as a result of our
document production requests. These documents included, but were not limited to, those
relating to: (1) a 1998 Stanford inquiry (MFW-00894); (2) a Stanford inquiry and
investigation opened in 2005 (MFW-02973 and FW-02973); (3) a 1997 Broker-Dealer
(“B-D”) examination of Stanford (Examination No. 06-D-97-037); (4) a 1998 Investment
Adviser (“IA”) examination of Stanford (Examination No. 98-F-71); (5) a 2002 IA
examination of Stanford (Examination No. IA 2003 FWDO 012); and (6) a 2004 B-D
examination of Stanford (Examination No. BD 2005 FWDO 001). In instances when
documents were not available concerning a relevant matter, the OIG sought testimony
and conducted interviews of current and former SEC personnel with possible knowledge
of the matter.

         The OIG also requested documents from the Financial Industry Regulatory
Authority (“FINRA”), including documents concerning communications between FINRA
or its predecessor, the National Association of Securities Dealers (“NASD”) and the SEC
concerning Stanford, and documents concerning the SEC’s examinations and inquiries of
Stanford. The OIG also received and reviewed documents provided by the Stanford
Victims Coalition, including the results of surveys of Stanford investors conducted by the
Stanford Victims Coalition.

       The OIG also reviewed numerous other publicly available documents, including:
(1) Complaints filed by the SEC against Stanford and related parties in 2009; (2) the 2009
indictment of Robert Allen Stanford and others; (3) articles in various news media
concerning Stanford; and (4) SEC Litigation Releases and an Administrative Proceeding
Release concerning PII




                                                    3
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      disclosure to third parties. No redaction has been performed by the Office of Inspector General.
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      III.       TESTIMONY AND INTERVIEWS

              The OIG conducted 51 testimonies and interviews of 48 individuals with
      knowledge of facts or circumstances surrounding the SEC’s examinations and/or
      investigations of Stanford and his companies.

              SEC Inspector General H. David Kotz personally led the questioning in the
      testimony and interviews of nearly all the witnesses in the investigation. Kotz also led
      the investigative team for this ROI, which included PII
PII
PII
                                                                                          .5

             The OIG conducted testimony on-the-record and under oath of the following 28
      individuals:

                 1)       Julie Preuitt, Assistant Director (former Branch Chief), FWDO Broker-
                          Dealer Examination group, Securities and Exchange Commission; taken
                          on December 14, 2009 (“December 14, 2009 Preuitt Testimony Tr.”), and
                          January 26, 2010 (“January 26, 2010 Preuitt Testimony Tr.”). Excerpts of
                          Testimony Transcripts attached as Exhibits 5 and 6, respectively.
                          ENF Staff Atty 1
                 2)                              , former Staff Attorney, FWDO Enforcement program,
                          Securities and Exchange Commission; taken on December 14, 2009
                          (“ENF Staff Atty 1 Testimony Tr.”). Excerpts of Testimony Transcript attached
                          as Exhibit 7.

                 3)       Mary Lou Felsman, former Assistant District Administrator, FWDO
                          Examination program, Securities and Exchange Commission; taken on
                          December 15, 2009 (“Felsman Testimony Tr.”). Excerpts of Testimony
                          Transcript attached as Exhibit 8.
                          Staff Acct 1
                 4)                           Staff Accountant, FWDO Broker-Dealer Examination
                          group, Securities and Exchange Commission; taken on December 15,
                          2009 (Staff Acct 1 Testimony Tr.”). Excerpts of Testimony Transcript attached
                          as Exhibit 9.

                 5)       Unidentified former Branch Chief, FWDO Enforcement program,
                          Securities and Exchange Commission; December 15, 2009 (“Unidentified
                          Former FWDO Enforcement Branch Chief Testimony Tr.”). Excerpts of
                          Interview Transcript attached as Exhibit 10.


      5                                                                          PII
             Significant assistance in this investigation was also provided by
 PII




                                                              4
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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
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                IA Examiner 3
        6)                      Examiner, FWDO Investment Adviser Examination group,
                 Securities and Exchange Commission; taken on January 11, 2010 (“ IA Examiner 3
                 Testimony Tr.”). Excerpts of Interview Transcript attached as Exhibit 11.
                IA Examiner 1
        7)                          Examiner, FWDO Investment Adviser Examination
                 group, Securities and Exchange Commission; taken on January 11, 2010
                IA Examiner 1
                              Testimony Tr.”). Excerpts of Testimony Transcript attached as
                 Exhibit 12.
                 ENF BC 4
        8)                       , Branch Chief, FWDO Enforcement program, Securities
                 and Exchange Commission; taken on January 11, 2010 (“ENF BC 4
                 Testimony Tr.”). Excerpts of Testimony Transcript attached as Exhibit
                 13.
                 ENF Staff Atty 6
        9)                , Staff Attorney, FWDO Enforcement program, Securities and
                 Exchange Commission; taken on January 11, 2010.
                ENF Staff Atty 4
        10)                           Staff Attorney, FWDO Enforcement program, Securities
                 and Exchange Commission, PII
                PII
                                                                         taken on January 11,
                      ENF Staff Atty
                 2010 4              Testimony Tr.”). Excerpts of Testimony Transcript attached
                 as Exhibit 14.
                ENF BC 2
        11)                         , Branch Chief, FWDO Enforcement program,
                 Securities and Exchange Commission; taken on January 12, 2010
                 (“ENF BC 2   Testimony Tr.”). Excerpts of Testimony Transcript attached
                 as Exhibit 15.

        12)      Unidentified former Branch Chief, FWDO Examination group, Securities
                 and Exchange Commission; taken on January 12, 2010 (“Unidentified
                 Former FWDO Examination Branch Chief Testimony Tr.”). Excerpts of
                 Testimony Transcript attached as Exhibit 16.
                IA Examiner 2
        13)                           Examiner, FWDO Investment Adviser Examination group,
                 Securities and Exchange Commission; taken on January 13, 2010
                 (“IA Examiner 2 Testimony Tr.”). Excerpts of Testimony Transcript attached as
                 Exhibit 17.
                BD Exam BC 3        PII
        14)                                                                   Branch
                 Chief, FWDO Broker-Dealer Examination group and former Examiner,
                 FWDO Investment Adviser Examination group, Securities and Exchange
                 Commission; taken on January 26, 2010.

        15)      Victoria Prescott, Special Senior Counsel, FWDO Broker-Dealer
                 Examination group, Securities and Exchange Commission; taken on

                                                    5
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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
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                 January 27, 2010 (“Prescott Testimony Tr.”). Excerpts of Testimony
                 Transcript attached as Exhibit 18.
                 ENF Asst Dir 1
        16)                , Assistant Director, FWDO Enforcement program, Securities
                 and Exchange Commission; taken on January 27, 2010ENF Asst Dir 1 estimony
                 Tr.”). Excerpts of Testimony Transcript attached as Exhibit 19.

        17)      Hugh Wright, former Assistant District Administrator, FWDO
                 Examination group (former Assistant Director, FWDO Enforcement
                 program), Securities and Exchange Commission; taken on January 27,
                 2010 (“Wright Testimony Tr.”). Excerpts of Testimony Transcript
                 attached as Exhibit 20.
                 Exam Sr Cnsl
        18)                           Senior Counsel, FWDO Examination program,
                 Securities and Exchange Commission; taken on January 27, 2010
                 (“Exam Sr Cnsl Testimony Tr.”). Excerpts of Testimony Transcript attached
                 as Exhibit 21.

        19)      Katherine Addleman, former Associate District Director, FWDO
                 Enforcement group, Securities and Exchange Commission; taken on
                 January 28, 2010 (“Addleman Testimony Tr.”). Excerpts of Testimony
                 Transcript attached as Exhibit 22.
                BD Exam BC 2
        20)                 Branch Chief PII                  , FWDO Broker-Dealer
                 Examination group, Securities and Exchange Commission; taken on
                 January 28, 2010BD Exam BC 2Testimony Tr.”). Excerpts of Testimony
                 Transcript attached as Exhibit 23.
                BD Exam BC 1
        21)                         Branch Chief, FWDO Broker-Dealer Examination
                 group, Securities and Exchange Commission; taken on January 28, 2010
                BD Exam BC 1 Testimony Tr.”). Excerpts of Testimony Transcript attached
                 as Exhibit 24.

        22)      Jeffrey Cohen, Assistant Director, FWDO Enforcement program,
                 Securities and Exchange Commission; taken on February 16, 2010
                 (“Cohen Testimony Tr.”). Excerpts of Testimony Transcript attached as
                 Exhibit 25.
                 ENF Staff Atty 5
        23)                      Trial Counsel, FWDO PII                                 ,
                 FWDO Enforcement program), Securities and Exchange Commission;
                 taken on February 16, 2010 (ENF Staff Atty Testimony Tr.”). Excerpts of
                                             5
                 Testimony Transcript attached as Exhibit 26.




                                                    6
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Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


                ENF Staff Atty 2
        24)                , Staff Attorney, FWDO Enforcement program, Securities and
                 Exchange Commission; taken on February 16, 2010ENF Staff Atty Testimony
                                                                    2
                 Tr.”). Excerpts of Testimony Transcript attached as Exhibit 27.

        25)      Richard Connor, Assistant Ethics Counsel, Securities and Exchange
                 Commission; taken on February 23, 2010 (“Connor Testimony Tr.”).
                 Excerpts of Testimony Transcript attached as Exhibit 28.
                 BD Examiner 1
        26)                         Examiner, FWDO Broker-Dealer Examination group,
                  Securities and Exchange Commission; taken on February 26, 2010
               BD Examiner 1 Testimony Tr.”). Excerpts of Testimony Transcript attached as
                  Exhibit 29.
                ENF BC 3
        27)                   Branch Chief, FWDO Enforcement program, Securities and
                 Exchange Commission; taken on March 2, 2010 ENF BC 3 Testimony Tr.”).
                 Excerpts of Testimony Transcript attached as Exhibit 30.
                 Sen Cnsl                               PII
        28)                    Senior Counsel,                                                Securities
                 and Exchange Commission; taken on March 11, 2010.

        The OIG also conducted interviews of the following 20 persons with relevant
expertise and/or knowledge of information pertinent to the investigation:

        1)       Julie Preuitt, Assistant Director (former Branch Chief), FWDO Broker-
                 Dealer Examination group; conducted on October 2, 2009 (“Preuitt
                 Interview Tr.”), and November 2, 2009 (“Preuitt Interview
                 Memorandum”), attached as Exhibits 31 and 32, respectively.

        2)       Victoria Prescott, Special Senior Counsel, FWDO Broker-Dealer
                 Examination program, Securities and Exchange Commission; conducted
                 on October 29, 2009 (“Prescott Interview Tr.”). Excerpts of Interview
                 Transcript attached as Exhibit 33.
                ENF Staff Atty 4
        3)                       Staff Attorney, FWDO Enforcement program, Securities
                 and Exchange Commission; conducted on November 3, 2009 (“ENF Staff Atty 4
                 Interview Tr.”). Excerpts of Interview Transcript attached as Exhibit 34.
               ENF Staff Atty 3
        4)                   former Staff Attorney, FWDO Enforcement program,
                 Securities and Exchange Commission; conducted on November 9, 2009.
                 OEA 1             PII
        5)                                                      SEC Office of
                 Economic Analysis, Securities and Exchange Commission; conducted on
                 February 3 and 5, 2010OEA 1    Interview Memorandum”). Memorandum
                 of Interview attached as Exhibit 35.


                                                    7
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        6)       Harold Degenhardt, former District Administrator, FWDO, Securities and
                 Exchange Commission; conducted on February 17, 2010 (“Degenhardt
                 Interview Memorandum”). Memorandum of Interview attached as Exhibit
                 36.

        7)       Wayne Secore, Partner, Secore & Waller LLP; former District
                 Administrator, FWDO; conducted February 17, 2010 (“Secore Interview
                 Tr.”). Excerpts of Interview Transcript attached as Exhibit 37.

        8)       Jack Ballard, Partner, Ballard & Littlefield, L.L.P.; former Partner, Ogden
                 Gibson White & Broocks, L.L.P.; conducted February 19, 2010 (“Ballard
                 Interview Tr.”). Excerpts of Interview Transcript attached as Exhibit 38.
                 TSSB Empl 1      PII
        9)                                                 Texas State Securities
                 Board; conducted on February 24, 2010       Interview
                                                                TSSB Empl 1

                 Memorandum”). Memorandum of Interview attached as Exhibit 39.

        10)      Denise Crawford, Texas Securities Commissioner, Texas State Securities
                 Board; conducted on March 1, 2010 (“TSSB Interview Memorandum”).
                 Memorandum of Interview attached as Exhibit 40.
                TSSB Empl 2        PII
        11)                  ,                      Texas State Securities Board;
                 conducted on March 1, 2010 (“TSSB Interview Memorandum”).
                 Memorandum of Interview attached as Exhibit 40.
                 TSSB Empl 3         PII
        12)                                                                   Texas
                 State Securities Board; conducted on March 1, 2010 (“TSSB Interview
                 Memorandum”). Memorandum of Interview attached as Exhibit 40.

        13)      Spencer Barasch, Partner, Andrews Kurth LLP; former Assistant Director,
                 FWDO Enforcement program, Securities and Exchange Commission;
                 conducted on March 2, 2010 (“Barasch Interview Tr.”). Excerpts of
                 Interview Transcript attached as Exhibit 41.

        14)      Leyla [Basagoitia] Wydler, former registered representative of Stanford
                 Group Company; conducted on March 3, 2010 (“Wydler Interview Tr.”).
                 Excerpts of Interview Transcript attached as Exhibit 42.

        15)      Charles Rawl, President, Zenith Wealth Management, LLC; former
                 Financial Advisor, Stanford Group Company; conducted on March 9,
                 2010 (“Rawl and Tidwell Interview Tr.”). Excerpts of Interview
                 Transcript attached as Exhibit 43.

        16)      Mark Tidwell, CEO, Zenith Wealth Management, LLC; former Financial
                 Advisor, Stanford Group Company; conducted on March 9, 2010 (“Rawl

                                                    8
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                 and Tidwell Interview Tr.”). Excerpts of Interview Transcript attached as
                 Exhibit 43.
                RSFI 2            PII
        17)                                             Division of Risk, Strategy, and
                 Financial Innovation; conducted on March 22, 2010 RSFI 2   Interview
                 Memorandum”). Memorandum of Interview attached as Exhibit 44.
                RSFI 1             PII
        18)                    ,                 , Division of Risk, Strategy, and
                 Financial Innovation; conducted on March 23, 2010 RSFI 1      and Berman
                 Interview Memorandum”). Memorandum of Interview attached as Exhibit
                 45.

        19)      Gregg Berman, Senior Policy Advisor, Division of Risk, Strategy, and
                 Financial Innovation; conducted on March 23, 2010 RSFI 1    and Berman
                 Interview Memorandum”). Memorandum of Interview attached as Exhibit
                 45.

        20)      Stanford Victim; conducted on March 26, 2010 (“Stanford Victim
                 Interview Memorandum”). Memorandum of Interview attached as Exhibit
                 46.




                                                    9
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                RELEVANT STATUTES, RULES AND REGULATIONS

               The Commission’s Conduct Regulation and Canons of Ethics

       The Commission’s Regulation Concerning Conduct of Members and Employees
and Former Members and Employees of the Commission (hereinafter “Conduct
Regulation”), at 17 C.F.R. §§ 200.735-1 et seq., sets forth the standards of ethical
conduct required of Commission members and current and former employees of the SEC
(hereinafter, referred to collectively as “employees”). The Conduct Regulation states in
part:

                  The Securities and Exchange Commission has been
                  entrusted by Congress with the protection of the public
                  interest in a highly significant area of our national
                  economy. In view of the effect which Commission action
                  frequently has on the general public, it is important that . . .
                  employees . . . maintain unusually high standards of
                  honesty, integrity, impartiality and conduct. . . .

17 C.F.R. § 200.735-2.

        Rule 8 of the Conduct Regulation prohibits a former Commission employee from
appearing before the Commission in a representative capacity in a particular matter in
which he or she participated personally and substantially while an employee of the
Commission. 17 C.F.R. § 200.735-8 (a)(1). 6 For purposes of Rule 8, a matter is defined
as a “discrete and isolatable transaction or set of transactions between identifiable
parties.” 17 C.F.R. § 200.735-8(a)(1).

        The Commission’s staff has the obligation to continuously and diligently examine
and investigate instances of securities fraud, as set forth in the Commission’s Canons of
Ethics. 17 C.F.R. §§ 200.50, et seq. The Canons of Ethics state that “[i]t is characteristic
of the administrative process that the Members of the Commission and their place in
public opinion are affected by the advice and conduct of the staff, particularly the
professional and executive employees.” 17 C.F.R. § 200.51. Hence, “[i]t [is] the policy
of the Commission to require that employees bear in mind the principles in the Canons.”
Id.



6
    Rule 8 also imposes a two-year restriction on a former employee from appearing before the
Commission in a representative capacity in any matter that was under his or her official responsibility as an
employee of the Commission “at any time within a period of [one] year prior to the termination of such
responsibility.” 17 C.F.R. § 200.735-8(a)(3).




                                                     10
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         The Canons provide that “[i]n administering the law, members of this
Commission should vigorously enforce compliance with the law by all persons affected
thereby.” 17 C.F.R. § 200.55. The Canons acknowledge that Members of the
Commission “are entrusted by various enactments of the Congress with powers and
duties of great social and economic significance to the American people,” and that “[i]t is
their task to regulate varied aspects of the American economy, within the limits
prescribed by Congress, to insure that our private enterprise system serves the welfare of
all citizens.” 17 C.F.R. § 200.53. According to the Canons, “[t]heir success in this
endeavor is a bulwark against possible abuses and injustice which, if left unchecked,
might jeopardize the strength of our economic institutions.” Id. The Canons also affirm,
“A member should not be swayed by partisan demands, public clamor or considerations
of personal popularity or notoriety; so also he should be above fear of unjust criticism by
anyone.” 17 C.F.R. § 200.58. The Canons further state, “A member should not, by his
conduct, permit the impression to prevail that any person can improperly influence him,
or that any person unduly enjoys his favor or that he is affected in any way by the rank,
position, prestige, or affluence of any person.” 17 C.F.R. § 200.61.

                       Government-Wide Standards of Ethical Conduct

        The Standards of Ethical Conduct for Employees of the Executive Branch include
the following general principles that apply to every federal employee:

                 (1)      Public service is a public trust, requiring employees to place
                          loyalty to the Constitution, the laws and ethical principles above
                          private gain.

                                                  ***

                 (5)      Employees shall put forth honest effort in the performance of their
                          duties.

                                                  ***

                 (14)     Employees shall endeavor to avoid any actions creating the
                          appearance that they are violating the law of the ethical standards
                          set forth in this part. Whether particular circumstances create an
                          appearance that the law or these standards have been violated shall
                          be determined from the perspective of a reasonable person with
                          knowledge of the relevant facts.

5 C.F.R. § 2635.101(b).




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                         Federal Post-Employment Statutes and Rules

        Federal conflict-of-interest laws impose on former government employees a
lifetime ban on making a communication to or appearance before a federal agency or
court as follows:

                  Any person who is an officer or employee . . . of the
                  executive branch of the United States (including any
                  independent agency of the United States) . . . and who, after
                  termination of his or her service or employment with the
                  United States . . ., knowingly makes, with the intent to
                  influence, any communication to or appearance before any
                  officer or employee of any department agency [or] court
                  . . . on behalf of any other person (except the United States
                  . . . ) in connection with a particular matter –
                      (A) in which the United Sates . . . is a party or has a
                          direct and substantial interest,
                      (B) in which the person participated personally and
                          substantially as such officer or employee, and
                      (C) which involved a specific party or specific parties
                          at the time of such participation,
                  shall be punished as provided in section 216 of this title.

18 U.S.C. § 207(a)(1). 7

        The statute defines “the term ‘participated’ [as] an action taken as an officer or
employee through decision, approval, disapproval, recommendation, the rendering of
advice, investigation or other such action….” 18 U.S.C. § 207(i)(2). See also 5 C.F.R.
§ 2641.201(i)(1). Under the implementing ethics regulations, “[t]o participate
‘personally’ means to participate: (i) Directly, either individually or in combination with
other persons; or (ii) Through direct and active supervision of the participation of any
person [the employee] supervises, including a subordinate.” 5 C.F.R. § 2641.201(i)(2).
“To participate ‘substantially’ means that the employee’s involvement is of significance
to the matter.” 5 C.F.R. § 2641.201(i)(3). Participation may be substantial even if “it is
not determinative of the outcome of a particular matter.” Id.




7
     In addition, like Rule 8(a)(3), 18 U.S.C. § 207(a)(2) contains a two-year restriction pertaining to
particular matters which a former employee “knows or reasonably should know [were] actually pending
under his or her official responsibility as [a government] officer or employee within a period of [one] year
before the terminating of his or her service or employment with the United States . . . .”


                                                     12
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        Further, the statute defines “the term ‘particular matter’ [as] any investigation,
application, request for a ruling or determination, rulemaking, contract, controversy,
claim, charge, accusation, arrest, or judicial or other proceeding.” 18 U.S.C. § 207(i)(3).
The implementing regulations clarify the statutory prohibition as follows:

                 The prohibition applies only to communications or
                 appearances in connection with the same particular matter
                 involving specific parties in which the former employee
                 participated as a Government employee. The same
                 particular matter may continue in another form or in part.
                 In determining whether two particular matters involving
                 specific parties are the same, all relevant factors should be
                 considered, including the extent to which the matters
                 involve the same basic facts, the same or related parties,
                 related issues, the same confidential information, and the
                 amount of time elapsed.

5 C.F.R. § 2641.201(h)(5)(i).

        The regulations also make clear that “[w]hen a particular matter involving
specific parties begins depends on the facts,” and provide, in part, as follows:

                 A particular matter may involve specific parties prior to
                 any formal action or filings by the agency or other parties.
                 Much of the work with respect to a particular matter is
                 accomplished before the matter reaches its final stage, and
                 preliminary or informal action is covered by the
                 prohibition, provided that specific parties of the matter
                 actually have been identified.

5 C.F.R. § 2641.201(h)(4). One of the examples contained in the regulations provides as
follows:

                 A Government employee participated in internal agency
                 deliberations concerning the merits of taking enforcement
                 action against a company for certain trade practices. He
                 left the Government before any charges were filed against
                 the company for certain trade practices. He has
                 participated in a particular matter involving specific parties
                 and may not represent another person in connection with
                 the ensuing administrative or judicial proceedings against
                 the company.

Comment 1 to 5 C.F.R. § 2641.201(h)(4).


                                                   13
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                               Bar Rules of Professional Conduct

The District of Columbia Bar’s Rules of Professional Conduct provide as follows:

                 Rule 1.11—Successive Government and Private
                 Employment

                 (a)      A lawyer shall not accept other employment in
                          connection with a matter which is the same as, or
                          substantially related to, a matter in which the lawyer
                          participated personally and substantially as a public
                          officer or employee. Such participation includes
                          acting on the merits of a matter in a judicial or other
                          adjudicative capacity.

District of Columbia Rules of Professional Conduct, Rule 1.11, attached as Exhibit 47.

       Comment 4 to Rule 1.11 discusses the meaning of the term “substantially related”
as used in the rule, in part, as follows:

                 The leading case defining “substantially related” matters in
                 the context of former government employment is Brown v.
                 District of Columbia Board of Zoning Adjustment, 486
                 A.2d 37 (D.C. 1984)(en banc). There the D.C. Court of
                 Appeals, en banc, held that in the “revolving door” context,
                 a showing that a reasonable person, could infer that,
                 through participation in one matter as a public officer of
                 employee, the former government lawyer “may have had
                 access to information legally relevant to, or otherwise
                 useful in” a subsequent representation, is prima facie
                 evidence that the two matters are substantially related. If
                 this prima facie showing is made, the former government
                 lawyer must disprove any ethical impropriety by showing
                 that the lawyer “could not have gained access to
                 information during the first representation that might be
                 useful in the later representation.”

Id.
        The Texas Disciplinary Rules of Professional Conduct provide as follows:

                 Rule 1.10 Successive Governments and Private
                 Employment

                 (a)      Except as law may otherwise expressly permit, a
                          lawyer shall not represent a private client in

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                          connection with a matter in which the lawyer
                          participated personally and substantially as a public
                          officer or employee, unless the appropriate
                          government agency consents after consultation.

See Texas Disciplinary Rules of Professional Conduct, Rule 1.10, attached as Exhibit 48.

        For purposes of the above rule, the term “matter” includes:

                 (1)      Any adjudicatory proceeding, application, request
                          for a ruling or other determination, contract, claim,
                          controversy, investigation, charge accusation, arrest
                          or other similar, particular transaction involving a
                          specific party or parties; and
                 (2)      any other action or transaction covered by the
                          conflict of interest rules of the appropriate
                          government agency.

Id. at Rule 1.10(f).




                                                   15
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                                    EXECUTIVE SUMMARY


        The OIG investigation found that the SEC’s Fort Worth office was aware since
1997 that Robert Allen Stanford was likely operating a Ponzi scheme, having come to
that conclusion a mere two years after Stanford Group Company (“SGC”), Stanford’s
investment adviser, registered with the SEC in 1995. We found that over the next 8
years, the SEC’s Fort Worth Examination group conducted four examinations of
Stanford’s operations, finding in each examination that the CDs could not have been
“legitimate,” and that it was “highly unlikely” that the returns Stanford claimed to
generate could have been achieved with the purported conservative investment approach.
Fort Worth examiners dutifully conducted examinations of Stanford in 1997, 1998, 2002
and 2004, concluding in each case that Stanford’s CDs were likely a Ponzi scheme or a
similar fraudulent scheme. The only significant difference in the Examination group’s
findings over the years was that the potential fraud grew exponentially, from $250
million to $1.5 billion.

        While the Fort Worth Examination group made multiple efforts after each
examination to convince the Fort Worth Enforcement program (“Enforcement”) to open
and conduct an investigation of Stanford, no meaningful effort was made by Enforcement
to investigate the potential fraud or to bring an action to attempt to stop it until late 2005.
In 1998, Enforcement opened a brief inquiry, but then closed it after only 3 months, when
Stanford failed to produce documents evidencing the fraud in response to a voluntary
document request from the SEC. In 2002, no investigation was opened even after the
examiners specifically identified multiple violations of securities laws by Stanford in an
examination report. In 2003, after receiving three separate complaint letters about
Stanford’s operations, Enforcement decided not to open an investigation or even an
inquiry, and did not follow up to obtain more information about the complaints.

         In late 2005, after a change in leadership in Enforcement and in response to the
continuing pleas by the Fort Worth Examination group, who had been watching the
potential fraud grow in examination after examination, Enforcement finally agreed to
seek a formal order from the Commission to investigate Stanford. However, even at that
time, Enforcement missed an opportunity to bring an action against SGC for its admitted
failure to conduct any due diligence regarding Stanford’s investment portfolio, which
could have potentially completely stopped the sales of the Stanford International Bank
(“SIB”) CDs though the SGC investment adviser, and provided investors and prospective
investors notice that the SEC considered SGC’s sales of the CDs to be fraudulent. The
OIG investigation found that this particular action was not considered, partially because
the new head of Enforcement in Fort Worth was not apprised of the findings in the
investment advisers’ examinations in 1998 and 2002, or even that SGC had registered as
an investment adviser, a fact she learned for the first time in the course of this OIG
investigation in January 2010.


                                                   16
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        The OIG did not find that the reluctance on the part of the SEC’s Fort Worth
Enforcement group to investigate Stanford was related to any improper professional,
social or financial relationship on the part of any former or current SEC employee. We
found evidence, however, that SEC-wide institutional influence within Enforcement did
factor into its repeated decisions not to undertake a full and thorough investigation of
Stanford, notwithstanding staff awareness that the potential fraud was growing. We
found that senior Fort Worth officials perceived that they were being judged on the
numbers of cases they brought, so-called “stats,” and communicated to the Enforcement
staff that novel or complex cases were disfavored. As a result, cases like Stanford, which
were not considered “quick-hit” or “slam-dunk” cases, were not encouraged.

         The OIG investigation also found that the former head of Enforcement in Fort
Worth, who played a significant role in multiple decisions over the years to quash
investigations of Stanford, sought to represent Stanford on three separate occasions after
he left the Commission, and in fact represented Stanford briefly in 2006 before he was
informed by the SEC Ethics Office that it was improper to do so.

        The first SEC examination of Stanford occurred in 1997, two years after SGC
began operations and registered with the SEC, when the SEC Fort Worth Examination
staff identified SGC as a risk and target for examination. After reviewing SGC’s annual
audit in 1997, a former branch chief in the Fort Worth Broker-Dealer Examination group
noted that, based simply on her review of SGC’s financial statements, she “became very
concerned” about the “extraordinary revenue” from the CDs and immediately suspected
the CD sales were fraudulent.

        In August 1997, after six days of field work in an examination of Stanford, the
examiners concluded that SIB’s statements promoting the CDs appeared to be
misrepresentations. The examiners noted that while the CD products were promoted as
being safe and secure, with investments in “investment-grade bonds, securities and
Eurodollar and foreign currency deposits” to “ensure safety of assets,” the interest rate,
combined with referral fees of between 11% and 13.75% annually, was simply too high
to be achieved through the purported low-risk investments.

        The branch chief concluded after the 1997 examination that the SIB CDs
purported above-market returns were “absolutely ludicrous,” and that the high referral
fees SGC was paid for selling the CDs indicated they were not “legitimate CDs.” The
Assistant District Administrator for the Fort Worth Examination program concurred,
noting that there were “red flags” about Stanford’s operations that caused her to believe it
was a Ponzi scheme, specifically the fact that the “interest that they were purportedly
paying on these CDs was significantly higher than what you could get on a CD in the
United States.” She further concluded that it was “highly unlikely” that the returns
Stanford claimed to generate could be achieved with the purported conservative
investment approach.



                                                   17
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         The examiners also were concerned about the recurring annual “trailer” or
“referral” fee that SGC received from SIB for referring CD investors to SIB, which they
viewed to be “oddly high” and suspicious. This suspicion was heightened because the
examiners found that SGC did not maintain books and records for the CD sales, and
purported to have no actual information about SIB or the bases for the generous returns
that the CDs generated, notwithstanding the fact that they were recommending the CDs to
their clients and receiving these annual recurring fees for their referrals.

         Further, the examiners made the surprising discoveries of a $19 million cash
contribution that Robert Allen Stanford made personally to SGC in 1996, and of
significant loans from SIB to Stanford personally, discoveries which the branch chief
testified were red flags that made her assume that Stanford “was possibly stealing from
investors.” In the SEC’s internal tracking system, in which it recorded data about its
examinations, the Broker-Dealer Examination group characterized its conclusion from
the 1997 examination of SGC as “Possible misrepresentations. Possible Ponzi scheme.”

        The OIG investigation found that in 1997, the examination staff determined that
as a result of their findings, an investigation of Stanford by the Enforcement group was
warranted, and referred a copy of their examination report to Enforcement for review and
disposition. In fact, when the former Assistant District Administrator for the Fort Worth
Examination program retired in 1997, her parting words to the branch chiefwere, “keep
your eye on these people [referring to Stanford] because this looks like a Ponzi scheme to
me and some day it’s going to blow up.”

        Despite the examiners’ referral of their serious concern that SGC was part of a
Ponzi scheme, the Enforcement staff did not open a matter under inquiry (“MUI”) into
the Stanford case until eight months later, in May 1998, and did so only after learning
that another federal agency suspected Stanford of money laundering. The OIG
investigation further found the only evidence of any investigative action taken by
Enforcement in connection with this MUI was a voluntary request for documents that the
SEC sent SGC in May 1998. We found that after Stanford refused to voluntarily produce
numerous documents relating to SGC’s referrals of investors to SIB, no further
investigative steps were taken; after being opened for only three months, in August 1998,
the MUI was closed.

        Reasons provided by Enforcement as to why the inquiry was closed related to the
lack of U.S. investors affected by the potential fraud and the difficulty of the
investigation because it would have to obtain records from Antigua. However, we found
other, larger, SEC-wide reasons why the Stanford matter was not pursued, including the
preference for “quick hit” cases as a result of internal SEC pressure, and the perception
that Stanford was not a “quick hit” case.

        The OIG investigation also found that in June 1998, while the Stanford MUI was
open, the Investment Adviser Examination group in Fort Worth began another
examination of SGC. This investment adviser examination came to the same conclusions

                                                   18
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as the broker-dealer examination, finding Stanford’s “extremely high interest rates and
extremely generous compensation” in the form of annual recurring referral fees, and the
fact that SGC was so “extremely dependent upon that compensation to conduct its day-
to-day operations,” very suspicious.

        The investment adviser examiners also noted during the 1998 examination the
complete lack of information SGC had regarding the CDs and the SIB investment
portfolio that purportedly supported the CDs’ unusually high and consistent returns. The
examiners concluded that SGC had “virtually nothing” that “would be a reasonable basis”
for recommending the CDs to its customers. In fact, the examiners found that no one at
SGC even maintained a record of all advisory clients who invested in the CDs.
Accordingly, the examiners identified possible violations of SGC’s fiduciary duty as an
investment adviser to its clients, noting the affirmative obligation on the part of an
investment adviser to employ reasonable care to avoid misleading clients, and that any
departure from this fiduciary standard would constitute fraud under Section 206 of the
Investment Advisers Act of 1940 (“Investment Advisers Act”).

       The OIG investigation found, however, that the Enforcement staff completely
disregarded the investment adviser examiners’ concerns in deciding to close the Stanford
MUI, and there was no evidence that the Enforcement staff even read the investment
advisers’ 1998 examination report. Notwithstanding this lack of Enforcement action, by
the summer of 1998, it was clear that both the investment adviser and broker-dealer
examiners “knew that [Stanford] was a fraud.”

         In November 2002, the SEC’s investment adviser Examination group conducted
yet another examination of SGC. In the 2002 examination, the investment adviser
examiners found that Stanford’s operations had grown significantly in the four years
since the 1998 Examination, from $250 million in investments in the purported
fraudulent CDs in 1998, to $1.1 billion in 2002. In 2002, these examiners identified the
same red flags that had been noted in the previous two examinations: “the consistent,
above-market reported returns,” which were “very unlikely” to be able to be achieved
with “legitimate” investments, and the high commissions paid to SGC financial advisers
for selling the SIB CDs without an understanding on the part of SGC as to what they
were referring.

       The investment adviser examiners also found that the list of investors provided by
SGC was inaccurate, as the list they received from SGC of the CD holders did not match
up with the total CDs outstanding based upon the referral fees SGC received in 2001.
The examiners noted that although they did follow up with SGC about this discrepancy,
they never obtained “a satisfactory response, and a full list of investors.”

       The 2002 Examination concluded that SGC was violating Section 206 of the
Investment Advisers Act by failing to conduct any due diligence related to the SIB CDs.
The 2002 Examination report stated:


                                                   19
 This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before
 disclosure to third parties. No redaction has been performed by the Office of Inspector General.
 Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


                  A review of SGC’s “due diligence” files for the SIB [CDs]
                  revealed that SGC had little more than the most recent SIB
                  financial statements (year end 2001) and the private
                  offering memoranda and subscription documents. There
                  was no indication that anyone at SGC knew how its clients’
                  money was being used by SIB or how SIB was generating
                  sufficient income to support the above-market interest rates
                  paid and the substantial annual three percent trailer
                  commissions paid to SGC.

         When the investment adviser examiners raised this issue with SGC, SGC
 markedly changed its representations to the SEC concerning its due diligence regarding
 SIB’s CDs. Previously, SGC represented that they essentially played no role in the
 investment decisions by SIB, but when challenged, SGC changed its story, and stated that
 they regularly visited the offshore bank, participated in quarterly calls with the Chief
 Financial Officer of the bank, and received quarterly information regarding the bank’s
 portfolio allocations (by sector and percentage of bonds/equity), investment strategies,
 and top five equity and bond holdings. SGC also told the examiners that information
 regarding the portfolio allocations was included in SGC’s due diligence files. Although
 the investment adviser examiners were surprised and suspicious about this discrepancy,
 and actually contemplated “drop[ping] by unannounced [at SGC] and ask[ing] to look at
 [the purported documents],” the OIG investigation found that the SEC did not follow up
 to obtain or review the newly-claimed due diligence information.

              After the examiners began this third examination of Stanford, the SEC received
 multiple complaints from outside entities reinforcing and bolstering their suspicions
  about Stanford’s operations. However, the SEC failed to follow up on these complaints
  or take any action to investigate them. On December 5, 2002, the SEC received a
  complaint letter from a citizen of Mexico who raised concerns similar to those the
  examination staff had raised. The October 28, 2002 complaint from Complainant 1
Complainant 1                to the SEC Complaint Center raised several issues, including the
  considerably higher interest rate of the Stanford CDs when compared with that which
  other banks were offering, the fact that Stanford’s returns were steady while other similar
  investments were significantly down, and noting that SIB’s auditor was in Antigua
  without significant regulatory oversight.
                                                   Complainant 1
         While the examiners characterized                          concerns as “legitimate,” the
 OIG investigation found that the SEC did not respond to theComplainant 1 complaint and did
 not take any action to investigate her claims. We found that while an SEC examiner
 drafted a letter toComplainant 1 asking for additional information, he was told that
 Enforcement had decided to refer her letter to the Texas State Securities Board (“TSSB”)
 and thus, never actually sent his draft letter to Complainant 1 . However, the OIG investigation
 found that although there was an intention to forward the Complainant 1 letter to the TSSB,
 there is no evidence that it was sent to the TSSB, either.


                                                     20
   This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before
   disclosure to third parties. No redaction has been performed by the Office of Inspector General.
   Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


           In addition, the OIG investigation found that although the examiners met with
   Enforcement officials in late 2002 to attempt to convince Enforcement to open an
   investigation or even an inquiry into the 2002 Examination Report’s findings,
   Enforcement staff declined to open a matter and likely never even read the 2002
   Examination Report. Moreover, even though the examiners were informed by
   Enforcement that the findings in the 2002 Examination Report were referred to the TSSB
   together with theComplainant 1 letter, after interviewing officials from the Enforcement staff
   and the TSSB, we found that no such referral was made.

           Thus, by 2003, it had been approximately six years since the SEC Examination
   staff had concluded that the SIB CDs were likely a Ponzi scheme. During those six
   years, the SEC had conducted three examinations which concluded the Stanford fraud
   was ongoing and growing significantly, but no meaningful effort was made to obtain
   evidence related to the Ponzi scheme.

                  In 2003, the SEC Enforcement staff received two new complaints that Stanford
     was a Ponzi scheme, but the OIG investigation found that nothing was done to pursue
     either of them. On August 4, 2003, the TSSB forwarded to the SEC a letter from Confidential
                                                                                             Source
  Confidential Source
                               in another Ponzi scheme action entitled PII
                                                                                         , which
     discussed several similarities between the PII               Ponzi scheme and what was
     known at the time about Stanford’s operations. Before sending the letter to the SEC, the
     TSSB Director of Enforcement called the SEC to discuss the matter and informed the
     SEC that because PII                 was such a large fraud, he thought he needed to bringConfidential
                                                                                                 Source
Confidential Source
                    ’s concerns regarding Stanford Group to the SEC’s attention. While the
Confidential Source
                    ’s complaint was forwarded to a branch chief in Enforcement, no action was
     taken to follow up.

          On October 10, 2003, the NASD forwarded a letter dated September 1, 2003,
   from an anonymous Stanford insider to the SEC’s Office of Investor Education and
   Assistance (“OIEA”) which stated, in pertinent part:

                    STANFORD FINANCIAL IS THE SUBJECT OF A
                    LINGERING CORPORATE FRAUD SCANDAL
                    PERPETUATED AS A “MASSIVE PONZI SCHEME”
                    THAT WILL DESTROY THE LIFE SAVINGS OF
                    MANY; DAMAGE THE REPUTATION OF ALL
                    ASSOCIATED PARTIES, RIDICULE SECURITIES
                    AND BANKING AUTHORITIES, AND SHAME THE
                    UNITED STATES OF AMERICA.

          The OIG investigation found that while this letter was minimally reviewed by
   various Enforcement staff, Enforcement decided not to open an investigation or even an




                                                      21
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Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


inquiry, but to refer it to the Examination group for yet another examination. The
Enforcement branch chief explained his rationale as follows:

                 [R]ather than spend a lot of resources on something that
                 could end up being something that we could not bring, the
                 decision was made to – to not go forward at that time, or at
                 least to – to not spend the significant resources and – and
                 wait and see if something else would come up.

       It is not clear what the Enforcement staff hoped to gain by “wait[ing] [to] see if
something else would come up” after the SEC had conducted three examinations of SGC
finding that the SIB CDs were likely a Ponzi scheme and received three complaints about
Stanford. It is also not clear what purpose the Enforcement staff thought would be served
by having the examiners conduct a fourth examination of SGC.

        However, they ultimately did just that. In October 2004, the Examination staff
conducted its fourth examination of SGC. In fact, the broker-dealer Examination staff
initiated this fourth examination of Stanford solely for the purpose of making another
Enforcement referral. By October 2004, approximately seven years since the SEC’s first
examination of SGC, the SEC examiners found that SGC’s revenues had increased four-
fold, and sales of the SIB CDs accounted for over 70 percent of those revenues. As of
October 2004, SGC customers held approximately $1.5 billion of CDs with
approximately $227 million of these CDs being held by U.S. investors. The 2004
examination concluded that the SIB CDs were securities and part of a “very large Ponzi
scheme.”

         The examiners analyzed the SIB CD returns using data about the past
performance of the equity markets and found that they were improbable. The
examination staff concluded that SGC’s sales of the SIB CDs violated numerous federal
securities laws and rules, including NASD’s suitability rule, material misstatements and
failure to disclose material facts, in violation of Rule 10b-5 of the Securities Exchange
Act of 1934 (“Exchange Act”); failure to disclose to customers its compensation for
securities transactions, in violation of Rule 10b-10 of the Exchange Act; and possible
unregistered distribution of securities in violation of Section 5 of the Securities Act of
1933.

        The 2004 Examination Report advocated that the SEC act against SGC for these
violations, in part, because of the difficulties in proving that SIB was operating a Ponzi
scheme. One examiner stated that after the 2004 Examination, he believed it was
incumbent on the SEC to do whatever it could to stop the growing fraud, noting, as
follows, “although it may be difficult to prove that the offering itself is fraudulent, SGC
has nonetheless committed numerous securities law violations which can be proved
without determining the actual uses of the invested funds.”



                                                   22
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Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


        The Examination staff also conducted significant investigative work during the
seven months from October 2004 through April 2005 to bolster its anticipated
Enforcement referral. They reached out to the SEC’s Office of Economic Analysis
(“OEA”) for assistance in taking the Examination staff’s quantitative analysis of
Stanford’s historical returns “a step further.” However, OEA did not assist the examiners
with any analysis of Stanford’s returns. The examiners also contacted an attorney in the
SEC’s Office of International Affairs (“OIA”) for information regarding Antigua’s
regulation of Stanford. In addition, they interviewed a former registered representative of
SGC, who told them that the sale of SIB’s CDs was a “Ponzi scheme.”

        However, in March 2005, senior Enforcement officials in Fort Worth learned of
the Examination staff’s work on Stanford and told them that it was not a matter that
Enforcement would pursue. A Special Senior Counsel in the Broker-Dealer Examination
group made a presentation about her ongoing work on Stanford at a March 2005 quarterly
summit meeting attended by the SEC, NASD, and state regulators from Texas and
Oklahoma. Immediately after her presentation, she recalled that she got “a lot of
pushback” from both the head of the Fort Worth office and head of Enforcement who
approached her and “summarily told [her] . . . [Stanford] was not something they were
interested in.”

       As the examiners were preparing a formal referral memorandum to the
Enforcement staff in an attempt to finally convince them to open an investigation, it was
announced that the head of Fort Worth Enforcement was leaving the SEC. Since he had
made it “very clear … he wasn’t going to accept [the Stanford referral]” at the March
2005 meeting, the examiners waited until he left the SEC to forward the referral to
Enforcement.

        The 2005 Enforcement Referral characterized the SIB CD returns as “too good to
be true,” noting that “from 2000 through 2002, SIB reported earnings on investments of
between approximately 12.4% and 13.3% . . .[while] [t]he indices we reviewed were
down by an average of 11.05% in 2000, 15.22% in 2001 and 25.87% in 2002.”

       The Enforcement staff initially reacted enthusiastically to the referral and opened
a MUI. They also contacted OIA to assist them in getting records from SIB in Antigua.
Further, the Enforcement staff sent questionnaires to U.S. and foreign investors in an
attempt to identify clear misrepresentations by Stanford to investors. However, by June
2005, the Enforcement staff had decided to refer the matter to the NASD, apparently as a
precursor to closing the inquiry. They had considered several options to obtain further
evidence, including a request under the Mutual Legal Assistance in Criminal Matters
Treaties, which were designed for the exchange of information in criminal matters and
administered by the U.S. Department of Justice. However, after the questionnaires
revealed no valuable information, the only tangible action taken was the sending of a
voluntary request for documents to Stanford.



                                                   23
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       On August 29, 2005, the Enforcement staff sent SIB its voluntary request for
documents. However, requesting voluntary document production from Stanford was a
completely futile exercise. Moreover, the Enforcement staff sent SIB the “standard
request” six days after SIB’s attorney “made it clear that SIB would not be producing
documents on a voluntary basis.” The only reason for the staff’s document request to
Stanford was apparent in a July 2005 e-mail from the branch chief, stating as follows:

                 I feel strongly that we need to make voluntary request for
                 docs from bank. If we don’t and close case, and later
                 Stanford implodes, we will look like fools if we didn’t even
                 request the relevant documents.

The Enforcement staff sent the request even though it recognized that its efforts to obtain
the requested documents voluntarily were “moot[].”

        After Stanford refused to voluntarily produce documents that would evidence it
was engaging in fraud, the SEC Enforcement staff was poised to close the Stanford
investigation. However, the Examination staff fought to keep the Stanford investigation
open. They appealed to the new head of Enforcement and considerable time was spent
over the next few months in an internal debate in the Fort Worth office concerning
whether to close the Stanford matter without investigation. While the two sides debated
whether to conduct an investigation, all agreed that Stanford was probably operating a
Ponzi scheme. One senior official noted, “[i]t was obvious for years that [Stanford] was
a Ponzi scheme.”

        Finally, in November 2005, the new head of Fort Worth Enforcement overruled
her staff’s and her predecessor’s objections to continuing the Stanford investigation and
decided to seek a formal order in furtherance of that investigation. However, the
Enforcement staff rejected the possibility of filing an “emergency action” against SIB
based on what they deemed circumstantial evidence that it was a Ponzi scheme. They
also decided that attacking Stanford’s alleged Ponzi scheme indirectly by filing an action
against SGC for violations of the NASD’s suitability rule, or failures to disclose or other
misrepresentations, would not be worthwhile. Most significantly, the Enforcement staff
did not even consider bringing an action against Stanford under Section 206 of the
Investment Advisers Act, which establishes federal fiduciary standards to govern the
conduct of investment advisers. Such an action against SGC could have been brought for
its admitted failure to conduct any due diligence regarding Stanford’s investment
portfolio based upon the complete lack of information produced by SGC regarding the
SIB portfolio that supposedly generated the CDs returns.

        Had the SEC successfully prosecuted an injunctive action against SGC for
violations of Section 206, an anti-fraud provision, it could have completely stopped the
sales of the SIB CDs though the SGC investment adviser. Further, the filing of such an
action against SGC could have potentially given investors and prospective investors
notice that the SEC considered SGC’s sales of the CDs to be fraudulent. A Stanford

                                                   24
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 disclosure to third parties. No redaction has been performed by the Office of Inspector General.
 Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


 Victims Coalition survey indicated that approximately 95% of 211 responding Stanford
 investors stated that knowledge of an SEC inquiry would have affected their decision to
 invest. One Stanford victim, who invested the money that she “saved through several
 years of business, nights working late and skipping vacations [she] could have taken with
 [her] family,” said that had she “known that Stanford Group was ever under investigation
 by the SEC, [she] would not have bought at all.” Indeed, the questionnaire that was sent
 out by Enforcement in June 2005 raised significant concerns among Stanford investors.
 A former vice president and financial adviser at Stanford from 2004 through 2007 who
 later contacted the SEC with concerns about Stanford, said that his phone “lit up like a
 Christmas tree the morning [the SEC questionnaire] went out.” However, after investors
 received the questionnaire about Stanford, many continued to invest because financial
 advisers told them that the fund had been given “a clean bill of health” by the SEC.
 Stanford officials were able to persuasively represent that Stanford had been given this
 “clean bill of health” because in fact, Stanford had been examined on multiple occasions
 and only been issued routine deficiency letters which they purportedly remedied.
 However, had a Section 206 action been commenced in 2005, it could have put many of
 Stanford’s victims on notice that there were regulatory concerns about their investments.

        The other significant benefit of bringing an action under Section 206 of the
 Investment Advisers Act (which the SEC eventually did when it filed its complaint in
 2009) was that it did not require that the fraud involve a security. DPP, WP
DPP, WP



DPP, WP




         The OIG investigation found that the decision not to even consider a Section 206
 action was based at least partially on the fact that the new head of Enforcement was
 unaware that the investment adviser Examination staff had done examinations of SGC in
 1998 and 2002, and was unaware that SGC was a registered investment adviser when the
 staff briefed her on the matter in November 2005. In fact, she only learned that SGC had
 been a registered investment adviser during her OIG testimony in the course of this
 investigation in January 2010. Because the Enforcement staff was not familiar with the
 findings of the 1998 and 2002 investment adviser examinations, they were not aware that
 this option had been documented by the examiners on more than one occasion.

         The OIG investigation also found evidence of larger SEC-wide reasons that the
 Stanford matter was not pursued over the years. We found that the Fort Worth
 Enforcement program’s decisions not to undertake a full and thorough investigation of
 Stanford were due, at least in part, to Enforcement’s perception that the Stanford case
 was difficult, novel and not the type favored by the Commission. The former head of the
 Fort Worth office told the OIG that regional offices were “heavily judged” by the number
 of cases they brought and that it was very important for the Fort Worth office to bring a
 high number of cases. This same person specifically noted that he personally had been
 “very outspoken” while at the SEC, but felt he was “bullet proof” because of the high
 number of cases that Fort Worth brought and, as a result, the Commission “could not get

                                                    25
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Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


rid of him.” The former head of Enforcement in Fort Worth also concurred that the


“number of cases [brought] were extremely important.” A Fort Worth Assistant Director
who worked on the Stanford matter stated:

                 Everybody was mindful of stats. … Stats were recorded
                 internally by the SEC in Washington. … I think when I
                 was assistant director, there was a lot of pressure to bring a
                 lot of cases. I think that was one of the metrics that was
                 very important to the home office and to the regions.

        The former head of the Examination program in Fort Worth testified that
Enforcement leadership in Fort Worth “was pretty upfront” with the Enforcement staff
about the pressure to produce numbers and communicated to the Enforcement staff, “I
want numbers. I want these things done quick.” He also testified that this pressure for
numbers incentivized the Enforcement staff to focus on “easier cases” – “quick hits.”
Accordingly, as a result of the “pressure on people to produce numbers, … anything that
didn’t appear … likely … to produce a number in a very short period of time got pretty
short shrift.” A former Fort Worth Examination branch chief also testified that the
Enforcement staff “were concerned about the number of cases that they were making and
that perhaps if it wasn’t a slam-dunk case, they might not want to take it because they
wanted to make sure they had enough numbers because that’s what they felt the
Commission wanted them to do.” The OIG investigation found that because Stanford
“was not going to be a quick hit,” Stanford was not considered as high priority of a case
as easier cases. The former branch chief in the Fort Worth broker-dealer Examination
group testified that the Enforcement Assistant Director working on the Stanford matter
“only wanted to bring cases that were slam dunk, easy cases.”

        In addition, according to the former head of the Fort Worth office, senior
management in Enforcement at headquarters expressed concern to Fort Worth that they
were bringing too many Temporary Restraining Order, Ponzi, and prime bank cases,
which they referred to as “kick in the door and grab” cases, or “mainstream” cases. Fort
Worth was told to bring more Wall Street types of cases, like accounting fraud. The
former head of Enforcement in Fort Worth told the OIG that when he was hired to his
position, Enforcement management in Washington, DC told him to clean up Fort Worth’s
inventory and repeatedly told him that Fort Worth’s emphasis should be on accounting
fraud cases. He was cautioned that Fort Worth was spending way too much of its
resources on “mainstream” cases, and that those resources would be better deployed on
accounting fraud cases. He specifically recalled that in November 2000, after Fort Worth
brought several Ponzi scheme cases, he was told by a senior official in the Enforcement
Division: “[Y]ou know you got to spend your resources and time on financial fraud.
What are you bringing these cases for?”



                                                   26
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        The OIG investigation also found that the SEC bureaucracy may have
discouraged the staff from pursuing novel legal cases. The former head of the Fort Worth
office confirmed that the arduous process of getting the SEC staff’s approval in
Washington, DC to recommend an Enforcement action to the Commission was a factor in
deciding which investigations to pursue. A former branch chief in the examination
program stated that she believed that the desire of the Enforcement staff to avoid difficult
cases was partly due to the challenges in dealing with the Commission’s bureaucracy.

       Finally, the OIG investigation revealed that the former head of Enforcement in
Fort Worth, who played a significant role in numerous decisions by the Fort Worth office
to deny investigations of Stanford, sought to represent Stanford on three separate
occasions after he left the SEC, and represented Stanford briefly in 2006 before he was
informed by the SEC Ethics Office that it was improper to do so.

        This former head of Enforcement in Fort Worth was responsible for: (1) in 1998,
deciding to close a MUI opened regarding Stanford after the 1997 broker-dealer
examination; (2) in 2002, deciding to forward theComplainant 1 complaint letter to the TSSB
and deciding not respond to the Complainant 1 complaint or investigate the issues it raised;
(3) in 2002, deciding not to act on the Examination staff’s referral of Stanford for
investigation after its investment adviser examination; (4) in 2003, participation in a
decision not to investigate Stanford after receiving Confidential Source ’s complaint letter
comparing Stanford’s operations to the PII              fraud; (5) in 2003, participating in a
decision not to investigate Stanford after receiving the complaint letter from an
anonymous insider alleging that Stanford was engaged in a “massive Ponzi scheme;” and
(6) in 2005, informing senior Examination staff after a presentation was made on
Stanford at a quarterly summit meeting that Stanford was not a matter they planned to
investigate.

        Yet, in June 2005, a mere two months after leaving the SEC, this former head of
the Enforcement in Fort Worth e-mailed the SEC Ethics Office that he had been
“approached about representing [Stanford] . . . in connection with (what appears to be) a
preliminary inquiry by the Fort Worth office.” He further stated, “I am not aware of any
conflicts and I do not remember any matters pending on Stanford while I was at the
commission.”

        After the SEC Ethics Office denied his request in June 2005, in September 2006,
Stanford retained this former head of Enforcement in Fort Worth to assist with inquiries
Stanford was receiving from regulatory authorities, including the SEC. He met with
Stanford Financial Group’s General Counsel in Stanford’s Miami office and billed
Stanford for his time. Following the meeting, he billed 6.5 hours to Stanford on October
4, 2006, for, inter alia, “review[ing] documentation received from company about SEC
and NASD inquiries.” On October 12, 2006, he billed Stanford 0.7 hours for a
“[t]elephone conference with [Stanford Financial Group’s General Counsel] regarding
status of SEC and NASD matters.” In late November 2006, he called his former
subordinate, the Assistant Director who was working on the Stanford matter in Fort

                                                   27
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Worth, who asked him during the conversation, “[C]an you work on this?” and who in
fact told him, “I’m not sure you’re able to work on this.” Near the time of this call, he
belatedly sought permission from the SEC’s Ethics Office to represent Stanford. The
SEC Ethics office replied that he could not represent Stanford for the same reasons given
a year earlier and he discontinued his representation.

        In February 2009, immediately after the SEC sued Stanford, this same former
head of Enforcement in Fort Worth contacted the SEC Ethics Office a third time about
representing Stanford in connection with the SEC matter – this time to defend Stanford
against the lawsuit filed by the SEC. An SEC Ethics official testified that he could not
recall another occasion in which a former SEC employee contacted his office on three
separate occasions trying to represent a client in the same matter. After the SEC Ethics
Office informed him for a third time that he could not represent Stanford, the former head
of Enforcement in Fort Worth became upset with the decision, arguing that the matter
pending in 2009 “was new and was different and unrelated to the matter that had
occurred before he left.” When asked why he was so insistent on representing Stanford,
he replied, “Every lawyer in Texas and beyond is going to get rich over this case. Okay?
And I hated being on the sidelines.”

       The OIG investigation found that the former head of Enforcement in Fort Worth’s
representation of Stanford appeared to violate state bar rules that prohibit a former
government employee from working on matters in which that individual participated as a
government employee. Accordingly, we are referring this Report of Investigation to the
Commission’s Ethics Counsel for referral to the Office of Bar Counsel for the District of
Columbia and the Chief Disciplinary Counsel for the State Bar of Texas, the states in
which he is admitted to practice law.

        We are also recommending that the Chairman carefully review this report’s
findings and share with Enforcement management the portions of this ROI that relate to
the performance failures by those employees who still work at the SEC, so that
appropriate action (which may include performance-based action, if applicable) is taken,
on an employee-by-employee basis, to ensure that future decisions about when to open an
investigation and when to recommend that the Commission take action are made in a
more appropriate manner. We are also recommending that the Chairman and Director of
Enforcement give consideration to promulgating and/or clarifying procedures with regard
to seven specific areas of concerns that we identify in the report.




                                                   28
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                            RESULTS OF THE INVESTIGATION


I.      IN 1997, THE FWDO EXAMINATION STAFF REVIEWED STANFORD’S
        BROKER-DEALER OPERATIONS AND MADE A REFERRAL TO
        ENFORCEMENT DUE TO A CONCERN THAT ITS SALES OF CDs
        CONSTITUTED A PONZI SCHEME

        A.       Two Years After Stanford Group Company Began Operations, the
                 SEC Identified It as a Risk and a Target For an Examination Based
                 on Suspicions That Its CD Sales Were Fraudulent

       Stanford Group Company (“SGC”) registered with the Commission as an
investment adviser in September 1995, and as a broker-dealer in October 1995. See
Exhibit 49 at 1; Exhibit 55 at 2. SGC was owned by Robert Allen Stanford, who also
owned several affiliated companies, including Stanford International Bank (“SIB”), an
offshore bank located in St. John’s, Antigua, West Indies. Exhibit 49 at 1.

        SGC conducted a general securities business through a fully disclosed clearing
arrangement with Bear Stearns Securities Corporation, and as of 1997, had five branch
offices and 66 employees, 25 of which were registered representatives. Id. At that time,
the firm had approximately 2,000 (1,200 foreign) customer accounts. Id.

       SGC was affiliated through common ownership with SIB, an offshore investment
bank. Id. at 2. SGC had a written agreement with SIB wherein SGC referred its foreign
customers to SIB, in return for which SIB paid a recurring annual 3.75% referral fee to
SGC on all deposits referred to SIB. Id. SIB offered these customers several types of
products, including the “FlexCD Account,” which comprised 96% of all cash deposits at
SIB. Id.

        The FlexCD Account required a minimum balance of $10,000, had maturities and
annual interest rates ranging from one month at 7.25% to 36 months at 10% and
withdrawals of up to 25% of the principal amount were allowed without penalties with a
five day advance notice. Id. As of July 31, 1997, SGC was due referral fees of $958,424
which was based on customer deposits at SIB of $306,695,545 (75% of all deposits at
SIB). Id.

       After SGC’s fiscal year ended in June 1997, Julie Preuitt, then a branch chief in
the FWDO Broker-Dealer Examination group, reviewed its annual audit as part of a
process to identify “target[s] for examinations.” 8 December 14, 2009 Preuitt Testimony
8
    Mary Lou Felsman, Assistant District Administrator for the FWDO Examination program from 1986
through the end of 1997 and Preuitt’s supervisor, described Preuitt as an “excellent” branch chief. Felsman
Testimony Tr. at 32.


                                                    29
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  Tr. at 13. Preuitt testified that, based on her review of SGC’s financial statements, she
  “became very concerned in terms [that SGC] had only been open for two years; and the
  firm had gone from very little revenue to an incredible amount of revenue in a very short
  time period, which [was] very unusual.” Id. Specifically, Preuitt explained that because
  SGC’s revenues from CDs were “extraordinary,” she scheduled an examination. Id. at
  14. Preuitt testified that based on the red flags she identified, she suspected the CD sales
  were fraudulent; “[i]t looked like … there was a problem…” Id. at 15.
                                                           Staff Acct 1
              Preuitt assigned the SGC examination to                    a FWDO staff
    accountant, because she had “the most confidence” in him, and believed he was “a very
    good examiner.” Id. at 16. At that point in timeStaff Acct 1 had seven years of experience
    conducting broker-dealer examinations at the National Association of Securities Dealers
    (“NASD”) and five years of experience conducting broker-dealer examinations at the
    SEC.Staff Acct 1 Testimony Tr. at 8-9. In addition to his experience, Preuitt testified that
Staff Acct 1
             “had excellent judgment.” December 14, 2009 Preuitt Testimony Tr. at 17.


          B.       After Conducting a Short Examination, the Examination Staff
                   Concluded That Stanford Was Probably Operating a Ponzi Scheme
                                                                           Staff Acct 1
         The staff accountant assigned to the SGC examination         spent six days at
  SGC’s Houston office conducting field work for the examination. STARS 9 Report,
  attached as Exhibit 50, at 1. The examination field work was completed on August 29,
  1997. Id. The Examination Report, issued on September 25, 1997 (the “1997
  Examination Report”), included the following findings:

                   Possible Misrepresentations -- Rule 10b-5

                   SIB promotes its products as being safe and secure. A
                   brochure regarding the products offered through SIB …
                   states that “funds from these accounts are invested in
                   investment-grade bonds, securities and Eurodollar and
                   foreign currency deposits.” The brochure indicates a high
                   level of safety for customer deposits. For example:
                   “banking services which ensure safety of assets, privacy,
                   liquidity and high yields”, [sic] “…protects its clients’
                   money with traditional safeguards”, “placing deposits only
                   with banks which have met Stanford’s rigorous credit
                   criteria”, “depository insolvency bond”, “bankers’ blanket
                   bond”, and “portfolio managers follow a conservative
                   approach”. [sic] Based on the amount of interest rate and

  9
       STARS is an acronym for Super Tracking and Reporting System, the SEC examination groups’
  internal tracking system. This system is described in more detail below.


                                                     30
This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before
disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


                 referral fees paid, SIB’s statements indicating these
                 products to be safe appear to be misrepresentations.

                 SIB pays out in interest and referral fees between 11% and
                 13.75% annually. To consistently pay these returns, SIB
                 must be investing in products with higher risks than are
                 indicated in its brochures and other written advertisements.

                 Because SIB is a foreign entity, we were unable to gain
                 access to SIB’s records.

Exhibit 49 at 2-3.

        Preuitt testified that she reviewed the draft examination report and the supporting
documents carefully “because [the matter] was very serious, and [she] wanted to feel very
comfortable with what [the examiners] were alleging….” December 14, 2009 Preuitt
Testimony Tr. at 18. Preuitt concluded that the SIB CDs’ purported above-market
returns were “absolutely ludicrous” and that the high referral fees SGC was paid for
selling the CDs indicated that they were not “legitimate CDs.” Id. at 24-25.
Consequently, Preuitt concluded that “[i]t was … impossible that this was a CD.” Id. at
25.

        Similarly, Mary Lou Felsman, Assistant District Administrator for the FWDO
Examination program from 1986 through the end of 1997, testified that there were “red
flags” about Stanford’s operations that caused her to believe it was a Ponzi scheme.
Felsman Testimony Tr. at 9, 16, 29. Felsman recalled that the primary “red flag” was:

                 [T]he interest that they were purportedly paying on these
                 CDs was significantly higher than what you could get on a
                 CD in the United States. And as far as I know -- I mean, I
                 wasn’t an expert on foreign investments, but I was
                 generally aware of the financial situation around the world
                 at that time. And whatever it was [Stanford] was offering
                 was far above what anybody else offered, so that was, you
                 know, kind of a red flag.

Id. at 14-15.

        According to Felsman, her suspicions about the interest rates that Stanford’s CDs
purportedly paid were heightened because those rates were supposedly generated with a
“safe, conservative” investment portfolio. Id. at 15. Felsman explained that it was
“highly unlikely” that the returns Stanford claimed to generate could be achieved with a
conservative investment approach. Id.



                                                   31
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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


        Staff Acct 1
                   was also concerned that the Stanford CDs were paying such high rates of
return, while at the same time SGC represented that the CDs were invested in safe, liquid
securities Staff Acct 1 Testimony Tr. at 15-16 Staff Acct 1 did not believe that these returns were
possible for a safe, liquid investment. Id. at 37, 43Staff Acct 1 testified: “I don’t know where
you can find something that’s safe and liquid that’s going to pay 11 to almost 14 percent
… It just doesn’t exist.” Id. at 16 Staff Acct 1 testified that SGC was unable to articulate
exactly how these returns were being achieved. Id. at 18 Staff Acct 1 was concerned that SGC
was misrepresenting to investors that the deposits were being invested in liquid, safe
investments. Id. at 20Staff Acct 1 further observed that the recurring annual “trailer” fee that
SGC received from SIB for referring CD investors to SIB was oddly high and did not
“smell right.” Id. at 34-35.
     Staff Acct 1
               also noted SGC’s failure to maintain books and records for the CD sales,
stating: “[I]f you’re going to recommend a particular investment, you need to know that
that investment is suitable for that client. … And in this instance … they didn’t have
that, I guess, new account information that we would require: name, address, financial
background.” Id. at 17-18. Preuitt testified that the examiners felt like they could not get
any actual information regarding SIB during their examination of SGC. December 14,
2009 Preuitt Testimony Tr. at 22.

      The examiners also discovered what they identified as an “item of interest” in the
1997 Examination Report as follows:

                        During 1996, Stanford made a cash contribution of
                        $19,000,000 to Stanford Group. We are concerned that the
                        cash contribution may have come from funds invested by
                        customers at SIB. We noted that SIB had loaned Stanford
                        $13,582,579. In addition, we noted that [Stanford Financial
                        Group] had borrowed $5,447,204 from SIB for a total
                        receivable at SIB of $19,029,783 directly and indirectly
                        from Stanford. We contacted the general counsel for the
                        Stanford companies regarding our concerns. The general
                        counsel stated that the cash contribution came from
                        personal funds and not from the above loans; however, it
                        seems at least questionable whether Stanford has access to
                        $19,000,000 in personal funds.

Exhibit 49 at 3.
                       Staff Acct 1
         Preuitt           and Felsman were suspicious about these loans that SIB had made
to Robert Allen Stanford and cash contributions that he, in turn, had made to SGC.
Preuitt testified that these transactions were a “red flag” that made her “assume[] he was
possibly stealing from investors.” December 14, 2009 Preuitt Testimony Tr. at 26. Staff Acct 1
testified, “It just baffled me that someone has 19 million dollars cash sitting on-hand to –
to loan out.”Staff Acct 1 Testimony Tr. at 16-17. Felsman also described the loans from SIB

                                                    32
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to Robert Allen Stanford and his $19 million cash contribution to SGC as another red
flag. Felsman Testimony Tr. at 29.
      Staff Acct 1
              testified that SGC’s general counsel could not satisfactorily demonstrate
that Stanford’s cash contribution to SGC came from personal funds Staff Acct 1 Testimony Tr.
at 16-17. Preuitt testified that the examiners wanted more information regarding the
origins of Stanford’s cash contributions, but they were unable to obtain this information.
December 14, 2009 Preuitt Testimony Tr. at 22-23.

        The SEC’s internal tracking system, STARS, records certain data about the SEC’s
examinations, including the disposition of the examinations. December 14, 2009 Preuitt
Testimony Tr., at 31-32 IA Examiner 1 Testimony Tr. at 18. The “Violations Description”
entry of the STARS report for the SGC examination stated: “Possible
misrepresentations. Possible Ponzi scheme.” See Exhibit 50 at 5.

         C.          As a Result of Their Concerns That Stanford Was Operating a Ponzi
                     Scheme, the Examination Staff Referred Their Stanford Findings to
                     the Enforcement Staff

        The 1997 Examination Report concluded that an investigation of Stanford for
violations of Rule 10b-5 was warranted due to “[p]ossible misrepresentation and
misapplication of customer funds.” Exhibit 49 at 1. The conclusion of the September 25,
1997 Examination Report stated as follows: “We will provide a copy of our report to the
FWDO Division of Enforcement for their review and disposition.” Exhibit 49 at 4.
Felsman recalled the examination staff referring the matter to Enforcement before she left
at the end of 1997. Felsman Testimony Tr. at 16. The Examination staff referred the
Stanford matter to Enforcement on September 25, 1997. See Exhibit 50 at 5; see also
December 14, 2009 Preuitt Testimony Tr. at 43. At that time, the Examination staff
provided Enforcement with a copy of its 1997 Examination Report Staff Acct 1 Testimony Tr.
at 37-38.

       Felsman testified that she believed Enforcement had not taken any action to
pursue the referral when she retired at the end of 1997. Felsman Testimony Tr. at 19.
When she retired, Felsman’s “parting words” to Preuitt were, “keep your eye on these
people because this looks like a Ponzi scheme to me and some day it’s going to blow up.”
Felsman Testimony Tr. at 26. Felsman also testified:

                     I’ve been gone 12 years. And during that period of time I
                     probably have seen or talked to Julie Preuitt perhaps six
                     times. And every time I talk[ed] to her I’d say, “Whatever
                     happened to Stanford?”

Id.



                                                   33
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II.       EIGHT MONTHS AFTER THE EXAMINATION STAFF REFERRED
          STANFORD, THE ENFORCEMENT STAFF OPENED, AND QUICKLY
          CLOSED, A MATTER UNDER INQUIRY

        Despite the examiners’ referral of their serious concern that SGC was part of a
Ponzi scheme, a Matter Under Inquiry (“MUI”) 10 was not opened until May 18, 1998
(the “1998 Stanford MUI”), approximately eight months after the Examination referral.
See 1998 MUI Form, attached as Exhibit 52 at 1. Preuitt recalled that “it took a long time
to get anybody [in Enforcement] to open something.” December 14, 2009 Preuitt
Testimony Tr. at 42.

          A.       The 1998 Stanford MUI Was Likely Not Even Opened in Response to
                   the Examination Staff’s Referral, But in Response to a Concern From
                   the U.S. Customs Department That Stanford Was Laundering Money

       The OIG investigation found that Enforcement likely only opened the MUI after
being contacted by the United States Customs Department regarding the possibility that
Stanford was involved in money laundering.

       The 1998 Stanford MUI was opened on May 18, 2008, at 5:17 p.m. Exhibit 52 at
3. Harold Degenhardt, District Administrator for the FWDO at that time, approved



10
      According to the SEC’s Enforcement Manual:
          Prior to opening a MUI, the assigned staff … should determine whether the known facts
          show that an Enforcement investigation would have the potential to address conduct that
          violates the federal securities laws. … To determine whether to open a MUI, the staff
          attorney, in conjunction with the Assistant Director, should consider whether sufficiently
          credible sources or set of facts suggests that a MUI could lead to an enforcement action
          that would address a violation of the federal securities laws. Basic considerations used
          when making this determination may include, but are not limited to:
                   ▪   The statutes or rules potentially violated
                   ▪   The egregiousness of the potential violation
                   ▪   The potential magnitude of the violation
                   ▪   The potential losses involved or harm to an investor or investors
                   ▪   Whether the potentially harmed group is particularly vulnerable or at risk
                   ▪   Whether the conduct is ongoing
                   ▪   Whether the conduct can be investigated efficiently and within the statute of
                       limitations period
                   ▪   Whether other authorities, including federal or state agencies or regulators,
                       might be better suited to investigate the conduct
March 3, 2010 SEC Enforcement Manual, relevant excerpts attached as Exhibit 51 at 20.


                                                      34
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  Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


  opening the MUI. 11 Id. at 2. The matter was classified as, inter alia, “Fraud in
  Offer/Sales/Purchases,” “Suitability” and “Possible Organized Crime.” Id. At 11:22 a.m.
  earlier the same day, BD Examiner 2 a broker-dealer examiner in FWDO, had e-mailed
  Hugh Wright, the Assistant District Administrator for the FWDO Enforcement group
  until June 1998, 12 the following:
                                                        Exam Sr Cnsl
                       I received note from                    an attorney in the
                       FWDO Examination group] to contact ENF Atty 1          [an
                       SEC Enforcement attorney in Washington, DC] re a
                       [broker-dealer] examination. ENF Atty 1       … explained he
                       had received a referral from US Customs Dept regarding
                       possible money laundering and wanted information
                       regarding our [broker-dealer] examination of Stanford
                       Group. …

                      Neither you nor Spence [Barasch] [the Assistant Director in
                      charge of the FWDO Enforcement program] were in so I
                      notified Hal [Degenhardt]. He was to followup with
                    ENF Atty 1
                               . I did not mail or fax any documents. See me when
                      you return and I’ll give full details.
                                        BD Examiner 2
  May 18, 1998 E-mail from                    to Hugh Wright, attached as Exhibit 53. Preuitt
  testified that she believed the referral from the U.S. Department of Customs was what
  convinced Enforcement to finally open the 1998 Stanford MUI. December 14, 2009
  Preuitt Testimony Tr. at 48.
         ENF Staff Atty 1
                             , the staff attorney assigned to the 1998 Stanford MUI , did not
   recall in her testimony whether or not she ever saw the 1997 Examination Report.
ENF Staff Atty 1
                 Testimony Tr. at 11-12.ENF Staff Atty 1 did recall, however, knowing about
   allegations of money laundering and drug trafficking concerning SGC. Id. at 13-20. In
   addition, the only specific aspect of the investigation that ENF Staff Atty 1 recalled was
   attending a meeting in Houston, Texas with several other law enforcement agencies,
   including the United States Attorney’s Office, the Postal Inspector, and the Secret
   Service, in which the agencies discussed the information they had regarding SGC’s
   possible involvement in money laundering and drug trafficking. Id. at 20-22. 13


  11
       Harold Degenhardt was District Administrator for the FWDO from 1996 to 2005. Degenhardt
  Interview Memorandum at 1.
  12
       In June 1998, Wright became the Assistant District Administrator for the FWDO Examination group;
  after his transfer, Spencer Barasch replaced Wright as the head of the FWDO Enforcement program.
  13                        ENF Staff Atty
       Preuitt testified that1      was not “particularly enamored with the examination process” and that
  she “was not an attorney I would have steered it to because she was not one that was easily approachable or
  particularly enthralled.” December 14, 2009 Preuitt Testimony Tr. at 50.


                                                                       35
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         B.        After Stanford Refused to Produce Documents, No Further
                   Investigative Steps Were Taken

              The only evidence of any investigative action taken by Enforcement in connection
 with the 1998 Stanford MUI was a voluntary request for documents that the SEC sent to
 SGC on May 27, 1998. See May 27, 1998 Letter from ENF Staff Atty 1          to Stanford Empl 2
                                                                   14
Stanford Empl 2  SGC Compliance Officer, attached as Exhibit 54. The SEC’s May 27, 1998
 voluntary request for documents sought, inter alia, information regarding individuals
 referred by SGC to SIB, marketing documents, and correspondence concerning SIB. See
 Id. The letter also requested that SGC Compliance Officer Stanford Empl 2 meet with the staff
 on June 23, 1998 to answer questions concerning SGC. Id. at 3. 15

        On June 10, 1998, Jack Ballard, a partner with Ogden, Gibson, White & Broocks,
L.L.P., who represented SGC, responded by letter to the SEC’s request for documents.
See June 10, 1998 Letter from Jack Ballard to ENF Staff Atty 1          attached as Exhibit 56.
                   ENF Staff Atty 1
Ballard informed                    that, instead of producing the name, address, and telephone
number of each individual or entity referred by SGC to SIB, SGC would only produce
two “representative referral files.” 16 Id. at 2. SGC refused to produce documents
reflecting the receipt, expenditure, transfer, use or allocation of funds from SIB by SGC,
suggesting as an alternative that, “[m]uch of the same information is provided in a report
entitled Detail of Referred Balances,” which they offered to provide for January through
April 1998. Id. at 3-4. SGC also refused to produce copies of SGC correspondence
relating to referrals to SIB and its products. Id. at 4.
                                                                            ENF Staff Atty 1
       On June 19, 1998, Ballard sent a follow-up letter to              and Degenhardt,
expressing “serious concerns” that the SEC staff’s inquiry might interfere with SGC’s
business. See June 19, 1998 Letter from Jack Ballard to ENF Staff Atty 1     copying Harold
Degenhardt, attached as Exhibit 58 at 2-3. In this letter, Ballard requested a meeting with
Degenhardt to discuss those concerns about the staff’s inquiry. Id. at 3.

       The OIG found no evidence that, after receiving Ballard’s response, the SEC staff
made further efforts to obtain documents from SGC, a registered entity that was obligated
to produce documents to the SEC. We also found that the staff did not seek a formal

14                                                                                             ENF Staff Atty
     Although the documents requested appear relevant to a securities fraud inquiry, 1                did not recall
in testimony that the 1998 Stanford MUI concerned possible fraud or a Ponzi scheme.ENF Staff Atty 1 Testimony
Tr. at 14-15 ENF Staff Atty 1 recalled that the matter related to allegations of money laundering and drug
trafficking. Id. at 14-18. However, she acknowledged that she was not aware of any other matters in which
the SEC investigated money laundering and that she did not know how or why the SEC would investigate
drug trafficking. Id.
15
    According to the 1998 Examination Report on Stanford, Stanford Empl had not been employed by SGC
                                                          2
since PII          . See Exhibit 55 at 7.
                                           ENF Staff Atty
16
    A June 30, 1998, letter from SGC to1            indicates that SGC sent “the referral files you
requested” on this date. See June 30, 1998 Letter from Lena Stinson toENF Staff Atty 1     attached as
Exhibit 57.


                                                            36
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  disclosure to third parties. No redaction has been performed by the Office of Inspector General.
  Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


  order in connection with this inquiry, which would have enabled it to subpoena
  documents and testimony. ENF Staff Atty 1 Testimony Tr. at 28.

          The OIG investigation found that Enforcement, notwithstanding its limited
  investigative efforts, shared the Examination group’s concerns that Stanford was
  operating a Ponzi scheme. In fact, the Assistant District Administrator for the FWDO
  Enforcement group Hugh Wright testified that in 1998, “As far as I was concerned at that
  period of time, in [E]nforcement we all thought it was a Ponzi scheme to start with.
  Always did.” Wright Testimony Tr. at 11. But, as Wright testified:

                     [W]e knew that the only way you’re going to be able to do
                     anything with regard to Stanford is if you get subpoena
                     power, and at that point in time, I don’t think we had
                     enough facts to where we could have sent up a memo to the
                     Commission to get the order that would have allowed us to
                     issue subpoenas.

  Id. at 13.

           C.        The Enforcement Staff Closed the 1998 Stanford MUI Three Months
                     After It Was Opened

          On August 6, 1998, approximately three months after the inquiry was opened, the
  Enforcement staff closed the Stanford MUI. See MUI Closing Form, attached as Exhibit
  59 at 1. The closing form indicates that the matter was “transferred to another Federal
  agency.” 17 Id. ENF Staff Atty 1 testified that the decision to close the MUI was made by
  Spencer Barasch, the Assistant Director for the FWDO Enforcement program at that
  time, possibly with Degenhardt’s involvement.ENF Staff Atty 1 Testimony Tr. at 31.

         Barasch told the OIG that he had “a very specific recollection” that when he
  replaced Wright in mid-1998 as the Assistant District Administrator for the FWDO
  Enforcement group, he reviewed the entire case inventory in the office, and that Stanford
  was one of the matters he reviewed. Barasch Interview Tr. at 10. Barasch recalled
  meeting with ENF Staff Atty 1 regarding which of her cases should be pursued and which cases
  should be closed. Id. at 12. Barasch told the OIG that he recalled deciding to close the
  Stanford MUI and to refer the Stanford matter to the NASD. 18 Id. Barasch also told the
  17
        The SEC staff granted access to its files concerning its 1998 Stanford inquiry to the Federal Bureau of
    Investigation, United States Customs Service, Office of the United States Attorney for the Southern District
    of Texas, and U.S. Internal Revenue Service. See July 24, 1998 Letter from Harold Degenhardt to FBI
FBI        August 10, 1998 Letter from Harold Degenhardt to IRS              ; August 25, 1998 Letter from
    Harold Degenhardt to Customs          ; and October 20, 1998 Letter from Harold Degenhardt to DOJ
 DOJ      , attached as Exhibits 60, 61, 62, and 63, respectively.
  18
     The OIG has not found any evidence that the Stanford matter was actually referred from the SEC to the
  NASD in 1998.


                                                       37
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OIG that Degenhardt may have been involved in the decision to close the Stanford MUI.
Id. at 16.

        According to Preuitt, Barasch called her into his office to tell her he was closing
the MUI because he “didn’t expect a very happy response” from her. December 14, 2009
Preuitt Testimony Tr. at 51. Preuitt testified that Barasch explained to her that although
Enforcement had not “determined there was no fraud,” the matter was being closed due
to “some problems with the case.” Id. 19 Preuitt described her reaction to learning from
Barasch that the Stanford inquiry was being closed as “shock and disbelief and this
incredible feeling of failure and great disappointment.” Id.Staff Acct 1 described
Enforcement’s decision not to conduct a full-blown investigation of SGC as “kind of a
disappointment,” and testified that both Preuitt and he were frustrated that the
investigation was not going forward. Staff Acct 1 Testimony Tr. at 28.

                   1.      The Enforcement Staff Told the Examination Staff That an
                           Investigation of Stanford Was Not Warranted Because of the
                           Lack of U.S. Investors

        Preuitt testified that Enforcement’s “most significant” concern about pursuing the
matter was the lack of U.S. investors and that this issue caused “some folks in
Enforcement [to not want] to conduct an investigation.” December 14, 2009 Preuitt
Testimony Tr. at 44. Preuitt explained that “[i]n discussions with Enforcement, they
seemed to believe that [the lack of US investors] was a concern and maybe limited our
interest[].” 20 Id. at 35, 52. Preuitt’s view of the issue was “why would it matter[?]; we
have a U.S. broker-dealer engaged in fraud.” Id. at 35.

              Felsman also recalled that the staff believed that there were no U.S. citizens that
 had purchased Stanford CDs. Felsman Testimony Tr. at 28. She testified that the lack of
 U.S. investors created another issue for Enforcement because her understanding at the
 time was that “the Commission itself was [not] interested in entertaining cases not
 involving United States citizens.” Id. at 20.Staff Acct 1 also recalled there being a concern
 that there were no identified U.S. investors in the Stanford CDs, and he understood this to
 probably be the reason why the Stanford investigation “didn’t proceed as it should have.”
Staff Acct 1
             Testimony Tr. at 25-26.




19
   Barasch did not recall this conversation with Preuitt about closing the 1998 Stanford MUI, but said he
“may have very well” had that conversation. Barasch Interview Tr. at 18.
20 IA Examiner 1
                      an FWDO examiner who, as discussed below, conducted a second examination of
SGC in 1998, testified that while generally, the lack of U.S. investors does not “matter in terms of the
SEC’s ability to bring an action … it does factor into [Enforcement’s] priorities.” IA
                                                                                    Examiner 1 Testimony Tr. at
79.


                                                      38
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          Degenhardt acknowledged that he believed the lack of U.S. investors was “a
  factor” in determining whether to pursue a particular matter, and noted that Barasch
  shared his view. Degenhardt Interview Memorandum at 4.

                    2.       The Enforcement Staff Told the Examination Staff That an
                             Investigation of Stanford Would Be Too Difficult Because of
                             the Staff’s Inability to Obtain Records From Antigua

              Felsman recalled that Enforcement was concerned about a “major jurisdictional
     issue” related to the matter before she left the Commission at the end of 1997. Felsman
     Testimony Tr. at 20. IA Examiner 1        an FWDO examiner who, as discussed below,
     conducted a second examination of SGC contemporaneous with the 1998 Stanford MUI,
     testified that he learned that the staff closed the MUI without seeking a formal order
     because “they didn’t have any clear evidence of a fraud simply because they didn’t have
     enough information about what was going on at the offshore bank [and] they had
     questions about the jurisdiction and about their ability to successfully subpoena
     information from that offshore bank.”IA Examiner 1 Testimony Tr. at 24-25 Staff Acct 1 also
     testified that it was his understanding that another reason that the investigation did not go
     forward was the fact that SIB was an offshore entity, which was a jurisdictional issue.
Staff Acct 1
             Testimony Tr. at 26, 44.

          The Enforcement branch chief assigned to the 1998 Stanford MUI, who asked the
  OIG not to be identified, testified that the SEC staff could not proceed with the matter
  because they did not have access to foreign records concerning Stanford, and they had
  insufficient information regarding how Stanford achieved the purported returns.
  Unidentified Former FWDO Enforcement Branch Chief Testimony Tr. at 11. Barasch
  also told the OIG that the fact that the CDs were issued by a foreign bank was a
  significant factor in his decision to close the 1998 Stanford MUI. Barasch Interview Tr.
  12-14. 21

          As discussed below in Section XII of this ROI, the OIG investigation found that
  there were larger SEC-wide reasons why Stanford matter was not pursued, including the
  message Barasch received from senior Enforcement officials to focus on accounting
  fraud cases; the difficulties in obtaining approval from the SEC staff in Washington, DC
  to pursue novel investigations; the pressure in the FWDO to bring a lot of cases; the
  preference for “quick hit” cases as a result of that pressure; and the fact that Stanford was
  not a “quick hit” case.

  21
        Barasch told the OIG that “at one point” he called the SEC’s Office of International Affairs (“OIA”)
  and asked how hard it would be to get documents located in Antigua, and OIA responded that it would be
  “almost impossible.” Barasch Interview Tr. at 35. However, the OIG found no other evidence that any
  Enforcement staff contacted OIA or sought assistance or information about obtaining documents from
  Antigua before closing the 1998 Stanford MUI. OIA staff has no record or recollection of any contact by
  the FWDO regarding Stanford before December 2004. See March 22, 2010 E-mail from OIA Atty 2
  to OIG Staff 1   , attached as Exhibit 64.


                                                      39
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                 3.       SGC’s Outside Counsel, a Former Head Of The SEC’s Fort
                          Worth Office, May Have Assured Barasch That “There Was
                          Nothing There”

        SGC was represented by two outside counsel in connection with the SEC’s 1998
Enforcement MUI: (1) Ballard, and (2) Wayne Secore, a founding partner of Secore and
Waller. See June 19, 1998 Letter from Jack Ballard to ENF Staff Atty 1 attached as
Exhibit 65; Secore Interview Tr. at 3-4. Secore previously had been District
Administrator of the FWDO, from approximately 1981 through 1986. Secore Interview
Tr. at 3.

       The June 19, 1998 letter discussed above, from Jack Ballard to ENF Staff Atty 1
copying Degenhardt, stated the following:

                 As you know, Wayne Secore and I represent Stanford
                 Group Company (“SGC”), a registered broker-dealer and
                 investment advisor, in connection with the informal inquiry
                 being conducted by the Fort Worth District Office. We
                 have had several telephone discussions with you
                 concerning the scope of the inquiry which, as you have
                 informed us, primarily concerns the relationship of SGC
                 with Stanford International Bank (“SIB”), a private
                 international bank located in Antigua, West Indies.

Exhibit 65.

       In his letter toENF Staff Atty 1 , Ballard expressed “serious concerns” about the SEC’s
inquiry interfering with SGC’s operations. Id. at 2. The letter concluded with the
following request for a meeting with Degenhardt:

                 Wayne [Secore] and I believe the seriousness of SGC’s
                 concerns warrant a personal meeting with you and Harold
                 Degenhardt to discuss those concerns raised in this letter.
                 Wayne and I are available at any time on Tuesday, June 23
                 or Wednesday, June 24. Please let me know at your
                 earliest convenience when a personal meeting with you and
                 Mr. Degenhardt can be scheduled.

Id. at 3. 22


22
    Although this letter and a June 10, 2008 letter to the SEC (see Exhibit 56) were from Ballard, Secore
appears to have been the lead attorney on the matter. An SGC document apparently created in February
2002 summarized the legal fees paid by SGC and indicated that SGC paid Secore’s firm, Secore & Waller,
$48,229.93 between June and October 1998 for services related to the 1998 SEC Enforcement matter. See
         (Footnote continued on next page.)

                                                   40
This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before
disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


        Neither Ballard nor Secore recalled meeting with the SEC staff about Stanford.
See Ballard Interview Tr. at 6; Secore Interview Tr. at 5, 8. However, Secore did say that
it was likely he met with senior SEC staff since the meeting was requested. Secore
Interview Tr. at 9-10. Secore said that it was “very rare” that his request for a meeting
with senior SEC staff was denied. Id. at 10.
      ENF Staff Atty 1
                    did not recall whether Degenhardt or Barasch met with Secore, but she
testified that it was very common for defense counsel in an investigation to contact
Barasch or Degenhardt and discuss the investigation. ENF Staff Atty 1 Tr. at 50-55. ENF Staff Atty 1
testified that she had been frustrated when this occurred. Id. at 51.

        During the course of this OIG investigation, Preuitt provided information alleging
that in mid-2009, Barasch told her that in 1998, he had relied on a representation from
Secore that the 1998 Stanford MUI should be closed. According to Preuitt, at a
restaurant in New Orleans, Louisiana, during a July 30 to August 1, 2009 social trip with
her, Barasch, FWDO Enforcement staff attorneyENF Staff Atty 4       and former FWDO
Enforcement staff attorney  ENF Staff Atty 3
                                             Preuitt asked Barasch why he had not pursued an
investigation of Stanford in 1998. December 14, 2009 Preuitt Testimony Tr. at 53-54.
Preuitt stated in her testimony that Barasch told her it was because “Wayne Secore had
told him there was nothing there.” Id. at 53; see also Preuitt Interview Tr. at 4-5 (stating
that Barasch told Preuitt “he asked Wayne Secore if there was a case there and Wayne
Secore said that there wasn’t. So he was satisfied with that and decided not to pursue it
further.”)

        Barasch told the OIG that he “vaguely” recalled Secore having represented
Stanford. Barasch Interview Tr. at 18-19. However, he adamantly denied that Secore
influenced his decision to close the Stanford MUI. Id. at 21. Barasch told the OIG that
he recalled the trip to New Orleans in mid-2009 with Preuitt,ENF4Staff , and ENF3Staff Id. at 19.
                                                             Atty            Atty

Barasch told the OIG that he recalled discussing the Stanford case with Preuitt during this
trip, and that Preuitt may have brought up the 1998 MUI in this conversation. Id. at 19-
21. Barasch, however, denied telling Preuitt that he closed the MUI because of a
representation by Wayne Secore about Stanford, stating that “I would never have said
that. … I would never accept an attorney’s representation about anything. … [T]hat’s
absurd.” Id. at 21. 23

February 28, 2002 E-mail, attached as Exhibit 66. By comparison, SGC paid Ballard’s firm $15,622.05 for
work related to the matter. Id.
                                ENF Staff
23
     Preuitt testified that she andAtty 4 discussed Barasch’s statement to her about closing the 1998 MUI
based on an assurance from Wayne Secore “several times,” including during a subsequent business trip on
October 21-22, 2009, while she andENF4Staff were having dinner at the same New Orleans restaurant.
                                         Atty
December 14, 2009 Preuitt Testimony Tr. at 88-89; December 15, 2009 E-mail from Julie Preuitt to David
Kotz, attached as Exhibit 67. On November 3, 2009ENF4Staff told the OIG that he did not recall having a
                                                      Atty
conversation with anyone about whether Wayne Secore had represented Stanford at some point. ENF Staff Atty 4
Interview Tr. at 3. He also told the OIG on November 3, 2009, that he didn’t know that Secore had ever
represented Stanford. Id.
         (Footnote continued on next page.)

                                                    41
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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.



III.     IN 1998, THE FWDO EXAMINATION STAFF EXAMINED SGC’S
         INVESTMENT ADVISER OPERATIONS AND REACHED THE SAME
         CONCLUSION AS THE BROKER-DEALER EXAMINERS:
         STANFORD’S CD SALES WERE PROBABLY FRAUDULENT

              In June 1998, while the 1998 Stanford MUI was open, the FWDO’s investment
  adviser Examination group began an examination of SGC. See Exhibit 55. IA Examiner 1
IA Examiner 1                    24
               and IA Examiner 3    were the examiners assigned to the matter. Id.
        IA Examiner 1
               , the senior examiner on the matter, testified that he was aware of the B-D
Examination group’s concerns about “possible misrepresentations and a possible Ponzi
scheme on the part of [Stanford]” when he started working on the 1998 Exam. IA Examiner 1
Testimony Tr. at 18.IA Examiner 1 also “understood the broker-dealer folks … were concerned
that there wasn’t a lot of information about what the offshore bank was doing with the
money that was being raised through the sale of the CDs.” Id. at 19.

       The resulting examination report, issued on July 16, 1998 (the “1998 Examination
Report”) stated:

                        The area of concern involves the registrant’s “referral” of
                        customers to an affiliated offshore bank for investment in
                        “Certificates of Deposit” (“CDs”) issued by that bank. The
                        examiners sought to gather information about “referrals” of
                        advisory clients. ….

                        The examination revealed that at least seventeen SGC
                        advisory client accounts have also invested an as-yet
                        undetermined amount in the CDs. It was also represented
                        to the examiners that these clients are non-U.S. citizens.
                        Based upon the amount of referral fees earned by SGC in
                        1997, it appears that SGC brokerage and advisory clients
                        may have invested as much as $250 million in the CDs.
                        There is an outstanding request for the name, address and
                        amount invested for each SGC advisory client who has also
                        invested in the CDs.
                        …


     On January 11, 2010ENF4Staff provided the OIG with sworn, on-the-record testimony, and reiterated his
                           Atty
claim that he had not heard that Secore ever represented Stanford ENF4Staff Testimony Tr. at 25. He also
                                                                  Atty
testified that he was not “aware of any role that Spence Barasch p          the Stanford investigation” and
would not “have associated Spence Barasch with Stanford.” Id. at 28. FinallyENF4Staff testified that he did
                                                                                 Atty
not “recall ever having a discussion with [Preuitt] about Spence Barasch and Stanford.” Id. at 27.
                                        IA Exmnr
24
    The only substantive recollection3        had of the 1998 Examination was that it involved CDs that paid
suspiciously high returns IA
                          Examiner
                                   Interview Tr. at 8-9, 13.
                             3



                                                    42
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                         As of the date of this report, SGC has been unable to
                         provide a complete list of the advisory clients invested in
                         the CDs and the amount invested.
                         …

                         It was first represented to the examiners that no records
                         were kept by SGC in relation to the client investments in
                         the CDs. However, SGC later represented that such
                         records do exists [sic] and is compiling a list as
                         requested.[25]

Exhibit 55 at 1, 4. 26
         IA Examiner 1
               agreed that he shared the B-D examiners’ “concerns about the fact that
these CDs had relatively high interest rates and yet were being promoted as being very
safe and secure. IA Examiner 1 Testimony Tr. at 20. Like the B-D examiners, he was
suspicious about “how Stanford was able to achieve these returns with such allegedly
safe investments.” Id. at 20IA Examiner 1 summarized his concerns as follows:

                         [E]xtremely high interest rates, extremely generous
                         compensation, [SGC] is extremely dependent upon that
                         compensation to conduct its day-to-day operations. It just
                         smells bad.

Id. at 21.




25 IA Examiner 1
             explained, “[W]e asked the compliance personnel at Stanford have any advisory clients
invested in these CDs, and their first answer was we don’t know. … And, so during the course of the exam,
maybe even after the completion of the fieldwork, they eventually got back to me and gave me a list, I
believe, of names that included 17 names. IA Examiner 1 Testimony Tr. at 36 IA Examiner 1 found SGC’s initial
response that they did not know if any of SGC’s clients had purchased the Stanford CDs “suspicious.” Id.
at 37. He testified, “That was one in many red flags. I found it incredible that they wouldn’t know who
they referred, at a minimum, to the bank.” Id. at 44.
26
     The 1998 Examination Report also discussed the fact that two SGC compliance officers had left within
a two-month period and discrepancies in the reasons given for their departures. Exhibit 55 at 7. The report
concluded that those facts “raise concerns about SGC’s compliance system. … The examiners will bring
this matter to the attention of FWDO Division of Enforcement.” Id.


                                                      43
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 disclosure to third parties. No redaction has been performed by the Office of Inspector General.
 Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


                A.      The 1998 Examination Concluded That SGC’s Sales of SIB CDs Were
                        Not Consistent With SGC’s Fiduciary Obligation to Its Clients Under
                        the Investment Advisers Act
        IA Examiner 1
                 testified that one of his concerns about SGC that arose during the 1998
 Examination was the complete lack of information SGC had regarding the CDs and the
 SIB investment portfolio that purportedly supported the CDs unusually high and
 consistent returns. IA Examiner 1 explained:

                        We asked for all due diligence information that the adviser
                        or the Stanford Group Company possessed concerning the
                        CDs, whatever they had as to how the money was being
                        invested, performance returns of the portfolio, whatever
                        they had, and as I recall, they produced very, very little.
                        They claimed, we don’t have access to that information.
                        …

                        Well, the question is how would you sell it consistent -- in
                        the case of an adviser, consistent with your fiduciary duty
                        to your clients.
                        …

                        So my conclusion was, as I have asked you, give me
                        everything you’ve got about that investment, and they gave
                        me virtually nothing, certainly nothing in my mind that
                        would be a reasonable basis for making a recommendation
                        of an investment. So that’s why -- I think if you see the
                        letter I sent to Stanford as a result of this report, I put in
                        there [Section] 206[27] language about it doesn’t look like
                        you’ve got enough information to fulfill your fiduciary duty
                        in making this recommendation. … And that would have --
                        in my mind, have been one of the theories to bring a case
                        against the adviser by enforcement that that was such a -- a
                        glaring absence of basis for a recommendation that it
                        amounted to deceit or fraud upon the client.
IA Examiner 1
                Testimony Tr. at 41-44.




 27
      Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-6, prohibits certain transactions
 by investment advisers.


                                                     44
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        On July 16, 1998, the SEC sent a letter to SGC that identified some of its
concerns resulting from the 1998 Examination. That letter described SGC’s “[f]iduciary
[o]bligation” to its clients as follows:

                   An adviser has a fiduciary relationship with clients and
                   owes them undivided loyalty. … [An] investment adviser
                   has an … affirmative obligation to employ reasonable care
                   to avoid misleading clients.[28] Any departure from this
                   fiduciary standard may constitute fraud upon clients under
                   Section 206 of the Advisers Act.

                   During the examination, it was learned that representatives
                   of SGC recommend to broker-dealer and advisory clients
                   investments in a “certificate of deposit” (“CDs”) issued by
                   an affiliated bank domiciled in St. John’s, Antigua, West
                   Indies, Stanford International Bank Limited (“SIB”). …
                   [I]t was represented that no one at SGC maintained a record
                   of all investors in the CDs or a record of all advisory clients
                   who invested in the CDs. …

                   SGC may be under a mistaken understanding that …
                   somehow these investment recommendations, or
                   “referrals,” fall outside the purview of the Advisers Act and
                   SGC’s duties thereunder. Please be advised that the
                   examiners do not take this position, but rather construe the
                   adviser’s duty of utmost good faith to apply to any and all
                   dealings between SGC and its advisory clients to whom it
                   owes a fiduciary duty. … Sections 206(1) and (2) forbid
                   fraud and deceit by an adviser in dealing with its clients
                   without regard to whether a security is involved.[29]
                               IA Examiner 3
July 16, 1998 Letter from                         to Robert Glen, attached as
Exhibit 69 at 3-4.




28
     In its Memorandum of Law in Support of Motion for Ex Parte Temporary Restraining Order,
Preliminary Injunction and Other Emergency Relief (“SEC Brief”), filed on February 17, 2009, attached as
Exhibit 68, the SEC cited SEC v. Capital Gains Research Bureau, Inc. et al., 375 U.S. 180, 194 (1983) for
the proposition that an investment adviser has “an affirmative obligation to employ reasonable care to avoid
misleading [his or her] clients.” Id. at 27.
29 IA Examiner 1
             testified that Stanford’s response to the deficiency letter was inadequate and did nothing to
allay his concerns that Stanford’s CD sales were fraudulent. IA Examiner Testimony Tr. at 55-56.
                                                               1




                                                     45
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         B.             The Enforcement Staff Failed to Consider the Investment Adviser
                        Examiners’ Concerns in Deciding Not to Investigate Stanford Further
     IA Examiner 1
                       testified that the IA Examination staff brought their concerns to
 Enforcement’s attention while the 1998 Stanford MUI was still open. IA Examiner 1 Testimony
 Tr. at 47. In factIA Examiner 1 testified that the only reason the examination staff did not make
 a second formal Enforcement referral of Stanford in connection with the 1998
 Examination was the fact that Enforcement already had an open MUI. Id. at 55-56.
IA Examiner 1
              testified, however, that there were no “coordination efforts” between the
 examiners and the Enforcement staff in connection with the 1998 Stanford MUI. Id. at
 29. IA Examiner 1 explained:

                        My exam was done. I did the exam report. I understood
                        enforcement was looking at it. I just thought enforcement
                        will go out and get whatever additional information they
                        need.
                                       ENF Staff Atty 1
Id. Enforcement staff attorney          testified that she had no recollection of an
examination of SGC in July 1998, and she did not recall the investment adviser
examiners referring any information to her or her branch chief about SGC. ENF Staff Atty 1
Testimony Tr. at 29-30.

              According to a former FWDO Examination branch chief, the Enforcement staff’s
  failure to coordinate with the examiners who were conducting an examination of Stanford
  contemporaneous with the 1998 MUI before deciding to close that MUI was, in his
  opinion, “crazy … nonsensical.” Unidentified Former FWDO Examination Branch Chief
  Testimony Tr. at 37; see also id. at 43 (The Enforcement staff’s failure to coordinate with
IA Examiner 1
              “doesn’t make any sense.”)
        IA Examiner 1
                testified that he was “concerned” when Enforcement closed the 1998
Stanford MUI because “we still had the same concerns that this thing is going to continue
to grow and we’re not really comfortable that it’s a legitimate operation.” IA Examiner 1
Testimony Tr. at 59. Specifically IA Examiner 1 concurred “that Stanford was operating some
kind of fraud.” Id. at 60. Preuitt testified that after the 1998 Examination, both the
investment adviser and broker-dealer examiners “knew that it was a fraud.” December
14, 2009 Preuitt Testimony Tr. at 60.




                                                          46
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  disclosure to third parties. No redaction has been performed by the Office of Inspector General.
  Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


  IV.      IN 2002, THE SEC EXAMINERS EXAMINED SGC’S INVESTMENT
           ADVISER OPERATIONS AGAIN AND REFERRED STANFORD TO
           ENFORCEMENT

              In November 2002, the SEC’s investment adviser examination group conducted
    yet another examination of SGC. See Exhibit 70.IA Examiner 2                    and IA Examiner 1
    were the examiners assigned to the matter. Id. at ii. IA Examiner 2 testified that he selected
    SGC as part of his plan to examine other registered investment advisers in Houston,
    Texas. IA Examiner 2 Testimony Tr. at 10-11 IA Examiner 2 testified that he asked IA Examiner 1 if he
    wanted to assist with the Houston examinations, including Stanford. Id. at 11-12. In
    response,IA Examiner 1 told IA Examiner 2 that IA Examiner 1 had examined SGC in 1998 and was
    concerned about its operations. Id. at 12IA Examiner 2 described IA Examiner 1 reaction to
IA Examiner 2    request for assistance as follows:
                                                          IA Examiner 1
                    [W]hen I mentioned Stanford [to             he kind of had
                    an odd look on his face and I asked him, “What’s wrong
                    with Stanford?” And he explained to me that he had been
                    there in [1998], and that he had strongly suspected that the
                    affiliated bank of the investment advisor had problems.
                    …

                    I asked him what type of problems, you know, what was
                    the deal, and -- I can’t remember whether he actually came
                    out and said Ponzi scheme or fraud but he made it clear that
                    the bank was taking in deposits and he suspected that,
                    whenever there was a redemption, they were just taking
                    that money out of -- new money from new investors. So
                    like I said, I can’t remember if he used the word “fraud” or
                    “Ponzi scheme,” but he made it clear that that’s what he
                    suspected.

  Id. at 12.

           A.       In the 2002 Examination, the Examiners Found That Stanford’s CD
                    Sales Had Increased Significantly, Which Led to Concerns That the
                    Potential Ponzi Scheme Was Growing

          Stanford’s operations had grown significantly in the four years since the 1998
  Examination. The 1998 Examination Report stated, “Based upon the amount of referral
  fees earned by SGC in 1997, it appeared that SGC brokerage and advisory clients may
  have invested as much as $250 million in the CDs.” Exhibit 55 at 1. According to the
  Examination report issued on December 19, 2002 (the “2002 Examination Report”), “At
  the time of the current examination, the amount of referral fees received by SGC would
  be indicative of $640 million in CDs outstanding, primarily through SGC’s efforts.”


                                                     47
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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


2002 Examination Report, attached as Exhibit 70 at 2. The 2002 Examination Report
also noted:

                     According to the last Form D filed with the Commission on
                     January 29, 2002, SIB claimed to have sold $37.2 million
                     (of $150 million offered) in CDs to an undisclosed number
                     of U.S. resident accredited investors. This amount reflects
                     additional deposits of $22.3 million to U.S. investors since
                     February 24, 2000, the date of the previous Form D, when
                     SIB reported total sales of $14.9 million. … SIB’s financial
                     statements for the year ended December 31, 2001, …
                     indicated total ‘certificates of deposit’ of $1.1 billion.

Id. at 10.

        The 2002 Examination Report’s conclusions included, “Based upon the results of
this examination, the FWDO has assigned a “risk rating” of “1,” the highest risk rating
possible, primarily due to SGC’s sales of the CDs.” Exhibit 70 at 15.IA Examiner 2 testified
that a “big factor” in the assignment of a “high” risk rating to Stanford was the
“suspicions [that] the international bank was a Ponzi scheme.” IA Examiner 2 Testimony Tr. at
40.

         According to the branch chief assigned to the 2002 Examination, who asked not
to be identified, he and the examiners had “major concerns” about Stanford’s operations.
Unidentified Former FWDO Examination Branch Chief Testimony Tr. at 46-47. IA Examiner 2
testified that there were numerous red flags regarding the SIB CDs that caused him to
conclude that Stanford had been operating a Ponzi scheme and it was growing
exponentially. See, e.g., IA Examiner 2 Testimony Tr. at 68, 96. As IA Examiner 2 testified, one of
those red flags was the consistent, above-market reported returns, stating, “[W]hen you
take the CD rates, the commission, the overhead and added them together … it just
seemed very unlikely that they could invest in anything legitimate to earn a return to
cover all those expenses.”IA Examiner 2 Testimony Tr. at 29-30.
     IA Examiner 2
                testified that the high commissions paid to SGC financial advisers for
selling the SIB CDs was another significant cause of the staff’s suspicions. IA Examiner 2
made these observations in the following exchange:

                     Q: And did it make sense to you that Stanford Group
                        Company … [would] be able to persuade all these
                        people to invest [in the Stanford CDs] without having
                        any understanding as to what the product was … ?
                     A: It’s been my experience that, when you offer a
                        commission that high to a rep, they’ll find some way to
                        make it attractive to the customer.

                                                   48
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                      …

                      Q: [W]ould you agree … that the high referral fee was
                         indicative of a possible fraud in two respects. One is …
                         how you make a safe investment to support [the referral
                         fee] and the interest that you’re paying?
                      A: Right.
                      Q: But two, it’s indicative of a strong incentive that’s
                         being put on the reps to sell that product. Is that also
                         somewhat of a red flag … ?
                      A: Yes, that’s correct.

IA Examiner 2
                Testimony Tr. at 66-68.

       Another red flag that concerned the examiners was SGC’s claimed lack of
information about which of its clients had invested in the SIB CDs IA Examiner 2 testified that
during and after the examination IA Examiner 1 and he asked SGC several times for a list of
SGC’s investment advisory clients that had invested in SIB CDs. Id. at 30, 55. A March
20, 2003 e-mail fromIA Examiner 2 toIA Examiner 1 stated:

                      [SGC] sent us a list of CD investors. The list seems
                      awfully short. They didn’t include addresses - however,
                      just looking at the names the majority appear to be US
                      citizens.[30]
                                    IA Examiner 2        IA Examiner 1
March 20, 2003 E-mail from              to                       , attached as Exhibit 71.
                                                 IA Examiner 1
Approximately two months later, on May 22, 2003,               e-mailed IA Examiner 2

                      I was thinking about going back to confirm with [SGC’s
                      Compliance Officer] that we had a full list of CD holders
                      that bought through SGC. The totals from the list she gave
                      us do not exactly match up with the total CDs outstanding
                      that should be out there based upon the referral fees SGC
                      received in 2001 ….




30 IA Examiner 2
            testified that he felt the issue of whether there were U.S. investors was irrelevant, but that he
understood that it was a factor for Enforcement. IA Examiner Testimony Tr. at 55-57.
                                                  2




                                                      49
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                                        IA Examiner 1   IA Examiner 2
                                                                                                         IA Examiner 2
    May 22, 2003 E-mail from               to                     attached as Exhibit 72.
    testified that he did not believe the examiners ever got “a satisfactory response [to the
    request], and a full list of investors.” 31IA Examiner 2 Testimony Tr. at 109.

              B.        The 2002 Examination Found That SGC Was Violating the
                        Investment Advisers Act By Failing to Conduct Any Due Diligence
                        Related to the SIB CDs

            The 2002 Examination Report included the following comment regarding Section
    206 of the Investment Advisers Act in its summary of violations, “[SGC] failed to
    document adequate due diligence with respect to its clients’ investments in its affiliated
    offshore bank’s certificates of deposit.” Exhibit 70 at 1. The 2002 Examination Report
    discussed SGC’s lack of due diligence as follows:

                        A review of SGC’s “due diligence” files for the SIB
                        certificates of deposit (“CDs”) revealed that SGC had little
                        more than the most recent SIB financial statements (year
                        end 2001) and the private offering memoranda and
                        subscription documents. There was no indication that
                        anyone at SGC knew how its clients’ money was being
                        used by SIB or how SIB was generating sufficient income
                        to support the above-market interest rates paid and the
                        substantial annual three percent trailer commissions paid to
                        SGC.
                        …
                        The examiners obtained copies of the disclosure documents
                        given to U.S. accredited investors …. [T]he document
                        provides no disclosure of specifically how the money will
                        be used by the issuer.

    Exhibit 70 at 10.




                                                            IA Examiner   IA Examiner
    31
            As discussed below, on December 16, 2002, 1                and 2         learned that Enforcement had
     decided not to investigate Stanford before seeing the 2002 Examination Report and before that report was
     even finished. On December 19, 2002IA Examiner 1e-mailedIA Examiner regarding their efforts to obtain
                                                                     2
     information from SGC regarding its clients who had invested in SIB CDs, stating, “On other hand, if we
     aren’t going to investigate the thing I don’t see that it matters.” December 19, 2002 E-mail from IA Examiner 1
IA Examiner 1  toIA Examiner 2   , attached as Exhibit 73.IA Examiner 2 testified that it would not have been a productive
     exercise to push for more information from SGC if Enforcement had already decided to not investigate the
     matter IA Examiner 2 Testimony Tr. at 90-91.


                                                                 50
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                IA Examiner 2
                                explained his rationale for concluding that SGC was violating Section
   206 as follows:

                            [F]or all of [SGC’s] investment advisory clients they were
                            [a] fiduciary and whenever they refer that client to some
                            other investment product, whether it’s a security or not,
                            they were supposed to do some due diligence into doing
                            that. So we asked them: Give us the due diligence file for
                            this offshore bank. We want to see [] everything you
                            looked at before you made this recommendation to refer
                            these clients over. The only thing we got if I remember
                            right was just the file with the financial statements and
                            maybe a couple other things in there. So IA Examiner 1
                            and I took the position that that wasn’t enough.
IA Examiner 2
           Testimony Tr. at 48-49 IA Examiner 1 also testified that he considered SGC’s due
   diligence files to have been “extremely lacking.”IA Examiner 1 Testimony Tr. at 75.

           On December 19, 2002, the Examination staff sent Stanford a deficiency letter to
   SGC’s Chief Compliance Officer, requesting that “SGC perform and document
   substantial additional due diligence to determine whether the use of proceeds by the
   issuer would indicate that the investment is suitable for its advisory clients.” See
   December 19, 2002 Letter from IA Examiner 1       to Jane Bates, attached as Exhibit 74 at
   8. That letter explained:

                            An adviser has a fiduciary relationship with clients and
                            owes them undivided loyalty. … Any departure from this
                            fiduciary standard may constitute fraud upon clients under
                            Section 206 of the Advisers Act and subject you to
                            administrative, civil and/or criminal sanctions.
                            …

                            The Examination Staff’s review of SGC’s due diligence file
                            with respect to its clients’ investments in the [SIB CDs]
                            indicated that SGC did not have adequate information upon
                            which to base a recommendation to a client.
                            …

                            The rates offered by the CDs, as compared with current
                            treasury rates, would indicate that the risk involved in the
                            CDs may be great.

   Id. at 7-8 (emphasis added).



                                                           51
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   disclosure to third parties. No redaction has been performed by the Office of Inspector General.
   Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


                In March 2003, in addressing the deficiencies identified during the 2002
    Examination, SGC markedly changed its previous representations to the SEC concerning
    its due diligence regarding SIB’s CDs. See March 13, 2003 Letter from Jane Bates to
   Staff Acct 2
                      attached as Exhibit 75 at 4. A March 19, 2003 e-mail from IA Examiner 2 to
IA Examiner 1
                 discussed SGC’s latest response to the examination staff’s deficiency letter as
    follows:

                           During the fieldwork of the examination, I got the definite
                           impression that the Registrant’s staff was trying to “wash
                           their hands” of the offshore bank and downplay the
                           activities of the bank in their office. We were told that
                           once a client was referred to the bank, the adviser’s
                           personnel no longer took an active role in managing that
                           portion of the client’s assets. Now Jane [its Chief
                           Compliance Officer] claims that Stanford’s COO and Chief
                           Compliance Officer regularly visit the offshore bank,
                           participate in quarterly calls with the CFO of the bank, and
                           receive quarterly information regarding the bank’s portfolio
                           allocations (by sector and percentage of bonds/equity, etc.),
                           investment strategies, and top five equity and bond
                           holdings. Jane also says that such information will now be
                           included in its due diligence files. I believe this to be a
                           mistake by Jane and others at Stanford - this response
                           should come in handy when the bank collapses and
                           everyone there plays dumb.[32] Also, if this information is
                           included in the due diligence file, we should have access to
                           it now …. Perhaps we should drop by unannounced and
                           ask to look at it.
                      IA Examiner 1
   Exhibit 71.                        responded:

                           On the Stanford Bank issue, I am not sure what to do. If
                           they have the information they gathered on these visits to
                           Antigua, why didn’t they give it to us when we asked for
                           it? I guess we should ask for it again.

   Id.

          Regarding SGC’s new claim to have information regarding SIB’s portfolio,
IA Examiner 2
           testified that it was “a red flag that all of a sudden [SGC] claimed to have this
   information when they didn’t have it before.”IA Examiner 2 Testimony Tr. at 96. In fact,

   32 IA Examiner 2
                testified that when he made this comment, he thought there was “about a 95 percent chance
   that [SIB] was going to collapse” because it was a Ponzi scheme IA Examiner 2 Testimony Tr. at 99.


                                                        52
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      IA Examiner 2
when        received this letter, he “knew right then, that either [SGC’s Chief
Compliance Officer] was a bit out of it or that she had lied.” Id. at 96-97.

        However, the OIG investigation found that the SEC never received, nor requested,
the information referenced in SGC’s March 13, 2003 letter. Id. Despite IA Examiner 2
suggestion in his March 19, 2003 e-mail that “[p]erhaps we should drop by unannounced
and ask to look at it,” we found that the SEC did not follow-up to obtain the newly-
claimed due diligence information. Exhibit 71 at 102-103.

         C.           During the 2002 Examination, the FWDO Enforcement Staff
                      Received a Letter From the Daughter of an Elderly Stanford Investor
                      Concerned That the Stanford CDs Were Fraudulent

        On December 5, 2002, Degenhardt received a letter dated October 28, 2002, from
a citizen of Mexico who raised concerns about Stanford similar to those raised by the
Examination staff. See October 28, 2002 Letter from Complainant 1
to SEC Complaint Center, copying Harold Degenhardt (the “Complainant 1 Letter”), attached
as Exhibit 76. TheComplainant 1 Letter stated:

                      My mother is an old woman with more than 75 years of age
                      and she has all her money my father inherited to her for his
                      life work in CDs of Stanford Bank. This is the only money
                      my mother has, and it is necessary for my mother, my
                      sisters and me for living. My mother put it in the United
                      States because of the bad situation in Mexico and because
                      the most important thing is to look for security. …

                      I am an accountant by profession and work for a large bank
                      in Mexico. I know some banking regulations of my
                      country that are very different from practices in Stanford
                      Bank and for that reason I am very nervous. Please look at
                      this bank and investigate if everything is honest and
                      correct. There are many investors from Mexico in this
                      bank.

                      My questions and doubts are listed here.

                      1.     Stanford says the CDs have insurance. My mother
                      receives two statements of accounts. One from Stanford
                      bank in Antigua with the CDs and another one from
                      Stanford and Bear Stearns in New York. I know Bear
                      Stearns is a very good company, but the statement of Bear
                      Stearns only has cash that my mother uses to take out
                      checks. This cash is the interest that the CD pays. Is the


                                                   53
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                  bank in Antigua truly covered by insurance of the United
                  States Government?

                  2.      The CD has a higher than 9% interest and I know
                  other big banks like Citibank pay interest of 4%. Is this
                  possible and secure?
                  …

                  4.      In December of 1999 the bank had a lot of
                  investments in foreign currencies and in stocks. In all the
                  world many stocks and foreign currencies came down in
                  2000. If a lot of money was in investments that came
                  down, how did the bank make money to pay the interest
                  and all of the very high expenses I imagine it has. …

                  5.      The accounting company that makes the audit
                  (C.A.S. Hewlett & Co) is in Antigua and [no]body knows.
                  I saw the case of ENRON with bad accounting and I am
                  preoccupied with another case of fraud accounting. Why is
                  the auditor a company of Antigua that [no]body knows and
                  not a good United States accounting company?

                  I know some investors that lost money in a United States
                  company named InverWorld in San Antonio. Please
                  review very well Stanford to make sure that many investors
                  do not get cheated. These investors are simple people of
                  Mexico and maybe many other places and have their faith
                  in the United States financial system.

Id. 33

33
    Approximately eleven months before receipt of this letter, Barasch was forwarded another complaint
from Complainant 2     that stated:
         I am currently providingPII          services to an Antigua company and have become
         very concerned about the unusual activities of the Stanford Financial Group, a Texas
         based organisation, operating though subsidiaries on the Island.
         …
         The Company has recently written off a significant, overdue interest payment as “a gift to
         the people of Antigua” to enable the Government to pay its public employees and has
         announced that it will now make further substantial loans.
         I draw this to your attention as these curious strategic decisions may not be reaching the
         shareholders of the Group and may ultimately be placing their investments at risk.
         I would be pleased to forward further information upon request.
         (Footnote continued on next page.)

                                                     54
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       IA Examiner 2                                     Complainant 1
                      testified regarding the       Letter, that “It looked like she had the
same sort of concerns we had, about the higher rate of interest. … ”IA Examiner 2 Testimony
Tr. at 62.IA Examiner 2 characterized those concerns as “legitimate.” Id.
                                                                                 Complainant 1
          D.           The FWDO Did Not Respond to the                                           Letter and Did Not Take
                       Any Action to Investigate Her Claim
     IA Examiner 1
                testified that his reaction to the letter was, “[T]his is great, we’ve got
actually somebody complaining.”IA Examiner 1 Testimony Tr. at 93. IA Examiner also felt that “we
                                                                     1

need[ed] to get in touch with this lady,” because he was “almost certain there was
something to her complaint.” Id. at 74.IA Examiner 1 drafted a response to her letter. Id. at 73-
74. That draft response stated, in part:

                       If the person who sold the CD to your mother is a
                       registered representative of SGC, a registered broker dealer
                       and investment adviser in the United States, there may be
                       some aid we can provide. … If you wish your letter to be
                       considered a complaint with regard to this registered
                       representative’s actions, we will forward your letter to SGC
                       and ask that they respond to you and this office to explain
                       why such an investment was suitable for your 75-year old
                       mother. That response might be enlightening to all of us.
                       …

                       With respect to the interest rate being paid, we share your
                       concerns about whether it is possible to pay such a high
                       interest rate in the current economic environment. As I am
                       sure you are aware, the general principal [sic] is that the
                       higher the interest rate offered, the more risk is being taken
                       in the investment. …
                                               Complainant 1                                               IA Examiner 1
December 2002 Draft Letter to                                                                       from
attached as Exhibit 78 (emphasis added).
                                                               IA Examiner 1
              The OIG investigation found that                                 response letter was never sent.
IA Examiner 1
              Testimony Tr. at 73-74.
                                   OIE Atty
February 5, 2002 E-mail from                    to Spencer Barasch, attached as Exhibit 77. The OIG
found no evidence that anything was done in response to this complaint.
34                             IA Examiner 1
    On December 11, 2002             e-mailed Wright the draft response and stated, Staff Acct 2     and I have
come up with this draft response to the lady in Mexico. It should at least get the ball rolling on responding.
Let us know what you want us to do.” See December 11, 2002 E-mail fromIA Examiner 1              to Hugh
Wright, attached as Exhibit 79. The draft response was circulated to ENF BC 4            , a branch chief in
Enforcement, who responded, “I want to spend more time with this. It may make sense after we look at
everything. The letter should come from the enforcement attorney.” Id.


                                                                   55
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  disclosure to third parties. No redaction has been performed by the Office of Inspector General.
  Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


                                                                                     Complainant 1
              E.                Although a Decision Was Made to Forward the            Letter to the
                                Texas State Securities Board, the Letter Was Never Forwarded
          IA Examiner 1                                                              Complainant 1
                  testified that after he had drafted a response to the             Letter, he was
  told that Barasch had decided to forward theComplainant 1 Letter to the Texas State Securities
  Board (“TSSB”). Id. at 91-92.IA Examiner 1 was “puzzled” by Barasch’s decision “because
  [he] didn’t see how the Texas State Securities Board could do even as much as we could
  potentially do, much less more. So it didn’t make any sense...” Id. at 92. According to a
  tracking report and a notation thatIA Examiner 1 made on that document, theComplainant 1 Letter
  was to have been forwarded to the TSSB “per Barasch” on December 10, 2002. See SEC
  Tracking Report, attached as Exhibit 80.
                                                                     Complainant 1
          However, the OIG investigation found that the               Letter was not sent to the
  TSSB. Denise Crawford, Texas State Securities Commissioner, and TSSB Empl 1             PII

  PII
                                      , told the OIG that the TSSB had searched its files and
  found no record of receiving the letter. TSSB Interview Memorandum at 4; TSSB Empl 1
  Interview Memorandum. Crawford also stated that, as a matter of procedure, if the SEC
  sends a letter to TSSB stating that the SEC is sending a complaint to the TSSB, the TSSB
  regularly keeps records of such letters. TSSB Interview Memorandum at 4. Crawford
  also stated that the fact that the TSSB does not have a record of such a letter in their files
  would indicate that the TSSB never received such a letter from the SEC. Id. 35 Similarly,
  the SEC has no record of Barasch having referred the matter to the TSSB. See February
  23, 2010 E-mail from Julie Preuitt to OIG Staff 2        attached as Exhibit 81.

              F.                In December 2002, the Examination Staff Referred Their Stanford
                                Findings to the Enforcement Staff

         Before the 2002 Examination Report was completed, the Examination staff met
  with the Enforcement staff several times to discuss their numerous concerns regarding
  Stanford.IA Examiner 2 testified that he and IA Examiner 1 had “several meetings with
  [E]nforcement” after returning from their Stanford examination, but that “there were no
  high-level attorneys there. IA Examiner 2 Testimony Tr. at 22. Specifically, he did not believe
  Degenhardt or Barasch attended any of those meetings. Id.

              The 2002 Examination Report found the following:

                                The [Stanford] website … provides all the terms and
                                conditions of the various types of CDs … offered by SIB
                                … A person accessing the website can easily get
                                information about how to contact SGC representatives,

  35                  TSSB Empl 2        PII
        Crawford,                                                     of the Texas State Securities Board, and
TSSB Empl 3               PII                                                of the Texas State Securities
  Board, all stated that they had never seen the letter before. TSSB Interview Memorandum at 4.


                                                           56
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  disclosure to third parties. No redaction has been performed by the Office of Inspector General.
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                   either by telephone or by email. As a result, the website
                   information appears to represent a general solicitation, or
                   public offering, of the CDs to U.S. persons.

  Exhibit 70 at 11-12. The 2002 Examination Report described the related Enforcement
  referral of this issue as follows:

                   The issue concerning the possible unregistered public
                   offering of the CDs has been referred to the FWDO’s
                   Enforcement Division, which has decided to refer the
                   matter to the Texas State Securities Board.

  Id. at 15 (footnote omitted).

          The concerns that the examiners discussed with the Enforcement staff included
  the fact that there was no indication that anyone at SGC knew how its clients’ money was
  being used by SIB or how SIB was generating sufficient income to support the above-
  market interest rates paid and the substantial annual three percent trailer commissions
  paid to SGC. The examiners’ concerns fueled “suspicions [that] the international bank
  was a Ponzi scheme.” IA Examiner 2 Testimony Tr. at 40.
                                                                             Complainant 1
          G.       Based on the Earlier Decision to Forward the       Letter to the
                   TSSB, the “Matter” Was Considered Referred to the TSSB Even
                   Before the 2002 Examination Report Was Sent to Enforcement.
                                      IA Examiner 1
              On December 16, 2002,           copied two of the Enforcement attorneys with
    whom he had been meeting regarding the Stanford matter on an e-mail exchange with
IA Examiner 2
               regarding Stanford. December 16, 2002 E-mail from IA Examiner 1      to IA Examiner 2
IA Examiner 2
              , attached as Exhibit 82. One of those attorneys, ENF BC 4
                                                                               , a branch chief
    in the Enforcement group, responded toIA Examiner 1 and copied Barasch:

                   You should be aware that, before you brought this matter to
                   my attention, Spence [Barasch] had already referred it to
                   the TSSB based on a complaint. Neither you nor I knew
                   about this referral. I have since conferred with Spence
                   about it. We decided to let the state continue to pursue the
                   case. When you are finished with your report, however, I
                   would like to read it. At that time, I will reevaluate our
                   interest in the matter.

  Id.




                                                      57
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           IA Examiner 1                                      Staff Acct                  IA Examiner 2
                 forwarded ENF BC 4                e-mail to 2             , Wright and                   with the
  following introduction:

                           Here’s the latest on status with ENF. Looks like TSSB will
                           handle the matter. I can’t wait to see Texas execute a
                           warrant in Antigua!![36]

  Exhibit 82.

                H.         The Enforcement Staff Did Not Open an Inquiry Into Stanford and
                           Did Not Even Review the 2002 Examination Report.
          IA Examiner 1
                 described his surprise at learning on December 16, 2002, that
  Enforcement had decided to not open a MUI based on the examiners’ concerns but had
  instead “decided to let the state continue to pursue the case,” as follows:

                           This was a shot out of the blue because I had sent him the
                           draft of my response letter to the Mexican lady and was
                           waiting to get some comment, get it cleared to get it going.
                           And then I received this e-mail saying,IA Examiner 1 it’s already
                           been referred to the Texas State Securities Board.
IA Examiner 1                                                        IA Examiner 2
         Testimony Tr. at 103; see also Exhibit 82.         testified that he was
  “disappointed” and “frustrated” by Enforcement’s decision to refer the Stanford matter to
  the TSSB. IA Examiner 2 Testimony Tr. at 91.

              On December 19, 2002,IA Examiner 2 e-mailed the 2002 Examination Report to
OCIE Exam Liaison    , the FWDO Examination Liaison in the Office of Compliance
  Inspections and Examinations (“OCIE”) in Washington, DC, and copied Barasch and



  36 IA Examiner 2
              testified that he “never did understand” Barasch’s rationale for referring the matter to the
  TSSB in the following exchange:
                A: … I’d hoped that they didn’t just push this off on Texas without -- and just close the
                   file and never look at it again.
                Q: … [W]hat would be the value of Texas pursuing this versus the SEC? What would
                   they be able to do that you guys couldn’t?
                A: That I never did understand. … I think it’s safe to say I was pretty confused, or --
                   just wasn’t expecting a referral to the State of Texas.
 IA Examiner
 2              Testimony Tr. at 84-85.
                                          TSSB
     TSSB officials Crawford and Empl 2 told the OIG that because the issuer – SIB – was overseas, it
  made much more sense for the SEC to pursue this matter rather than the TSSB. TSSB Interview
  Memorandum at 4.


                                                           58
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 Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


ENF BC 4                                                                         OCIE Exam Liaison
         . See December 19, 2002 E-mail from IA Examiner 2                  to                       ,
 attached as Exhibit 83.IA Examiner 2 e-mail stated:

                      The issue concerning the possible unregistered public
                      offering of the CDs has been referred to the FWDO’s
                      Enforcement Division,[37] which has decided to refer the
                      matter to the Texas State Securities Board.

 Id.

         After Barasch received IA Examiner 2 e-mail with the 2002 Examination Report
 attached, he asked ENF BC 4 “at your convenience, i.e., no rush, let me know what you
 think.” See Exhibit 83. However, the OIG found no indication thatENF BC 4 or Barasch
 ever read the 2002 Examination Report.ENF BC 4       testified that he had no recollection of
            ENF BC 4
 reading it           Testimony Tr. at 20. Similarly, Barasch told the OIG that he did not
 recall ever seeing the 2002 Examination Report. Barasch Interview Tr. at 23, 35, 40.

        Barasch stated that he did not recall why he decided not to open a MUI based on
 the         Letter or the 2002 Examination Report. 38 Barasch Interview Tr. at 35-36.
      Complainant 1


 Barasch further told the OIG that he did not recall having ever seen either of those two
 documents. Barasch Interview Tr. at 23-25, 35-36, 40, 43-44.

             I.       The Enforcement Staff Did Not Refer the 2002 Examination Report
                      Findings to the TSSB

              It appears that, contrary to what the Examination staff was told, the Stanford
 matter was not referred to the TSSB; rather Barasch just decided not to pursue the matter.
 Barasch told the OIG that he does not recall referring Stanford to the TSSB around this
 time. Barasch Interview Tr. at 23, 43-44. As discussed above, the OIG found that the
Complainant 1
                Letter was not forwarded to the TSSB. TSSB Empl 2      PII

PII
                    at that time, told the OIG that he was never informed by Barasch or anyone
 else at the SEC that the SEC’s Examination staff had referred anything related to
 Stanford for an Enforcement action in December 2002. TSSB Interview Memorandum at

 37
       Although the 2002 Examination Report discussed the factual predicate for a Section 206 violation, the
  cover page of the 2002 Examination Report, the “Conclusion” section of the 2002 Examination Report, and
IA Examiner 2 e-mail to Barasch, et al., only referred “[t]he issue concerning the possible unregistered public

              f the CDs.” See Exhibit 70 at i and 15; Exhibit 83IA Examiner 2 testified, “[A]s far as I was
  concerned, we referred the whole thing over to enforcement and to be honest with you, I didn’t care which
  one of these issues they wanted to take with and run, you know, we just wanted some action against the
  firm to try to shut them down.” IA Examiner Testimony Tr. at 70.
                                    2
 38
      When he reviewed the cover memorandum for the 2002 Examination Report during his OIG interview,
 Barasch noted that “just from a strict reading of this segment of this report, you know, again, there’s no
 reference to any fraud here. And there’s a reference simply to an unregistered offering of CDs.” Barasch
 Interview Tr. at 23-24.


                                                      59
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                               IA Examiner 2
   4-5. According to             even if the Stanford matter had been referred to the TSSB,
   the 2002 Examination Report would not have been sent to the TSSB pursuant to the
   SEC’s policy of not sharing its examination reports with “any outside agency or anyone.”
IA Examiner 2
              Testimony Tr. at 93.

             J.          In December 2002, the SEC Examination Staff Attempted to Interest
                         the Federal Reserve in Investigating Stanford, But Concluded That
                         the Federal Reserve Had DPP                    of Stanford

        In December 2002, as the Examination staff was completing its report, the staff
 contacted the Federal Reserve DPP, WP
DPP, WP

DPP, WP                                                                                          FR Empl
                     See Exhibit 82 at 2. On December 16, 2002, IA Examiner 2 e-mailed 1
 FR Empl 1
                 at the Federal Reserve Board as follows:

                         Thanks for your help! … [W]e believe that approximately
                         $640 million in CDs are currently outstanding from SGC’s
                         sales efforts (SGC receives a 3% annual commission from
                         Stanford International Bank for referring clients). … The
                         CDs pay a higher than market rate of interest, currently
                         ranging from 3.65% … to 8.15% …. The financial
                         statements of the international bank indicate approximately
                         $1,116,454,586 in outstanding customer deposits as of
                         12/31/2001. The financial statements are vague as to the
                         investment portfolio of the bank (approximately 59% is
                         invested in “equities”, while 41% is invested in “treasury
                         bonds, notes, corporate bonds”). … . After you get a
                         chance to review everything, please call me and tell me
                         what you think.
                                               IA Examiner 2
 February 12, 2003 E-mail from                                      to FR Empl 1   Exhibit 84 at 2-3.

          On February 12, 2003, after not receiving a response to his December 16, 2002
 e-mail, IA Examiner 2 e-mailed FR Empl 1 “Is anyone at your office interested in pursuing this
 matter? What is the current status?” See attached as Exhibit 84 at 2. After another three
 months had lapsed, on May 21, 2003, IA Examiner 1 e-mailed IA Examiner 2
                    Staff Acct 2
                                     and I saw Hal [Degenhardt] in the hallway this
                         morning shortly after our Stanford meeting. Hal made the
                         mistake of asking what I was up to and I made the mistake

 39 Examiner 1
   IA
             testified, “[W]e had the issue of …CDs being sold that for all intents and purposes appear[ed]
 to be banking activity. We thought the banking regulators might have some say in this and might have a
 regulatory hook to use against Stanford.” IA
                                            Examiner 1 Testimony Tr. at 100.




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                        of telling the truth. He now is concerned that we need to
                        pursue the Stanford Bank CD issue through OCIE with the
                        Federal Reserve. He believes that there needs to be a high-
                        level dialog on this between the SEC and Fed.
                                       IA Examiner 1                IA Examiner 2
May 21, 2003 E-mail from                                       to                       attached as Exhibit 85.

       On May 21, 2003 IA Examiner 1 contacted OCIE to address Degenhardt’s concern and
described the issue Degenhardt was concerned about as follows:

                        Degenhardt[] has expressed an interest in our having a
                        “high level” dialogue with the Federal Reserve regarding
                        the “CDs” discussed in our examination report on the
                        Stanford Group examination. … He is concerned about the
                        ability of Stanford International Bank (SIB) to offer these
                        CDs in the US without being a bank officially subject to
                        US banking regulation. … We have as yet received no
                        reply from the Federal Reserve (FR Empl 1      .)[40]
                                        IA Examiner 1               OCIE Exam Liaison
May 21, 2003 E-mail from                                       to                          attached as Exhibit 86 at
2.
                                                           IA Examiner 1
                                     IA Examiner 2
        On May 22, 2003                 asked       , “Did Hal [Degenhardt] say what kind
of role we [the Examination staff] were going to play in investigating this further?”
Exhibit 84 at 1.IA Examiner 1 explained that Degenhardt was not interested in the SEC
investigating the matter; he was only interested in “mak[ing] sure we had done all we
could do in alerting the banking authorities of our concerns ….” Id.
                                    IA Examiner 1
      On June 3, 2003,                              updated Wright on the discussions with the Federal
Reserve Board as follows:
               DPP, WP, PII




     IA Examiner              IA
40
     2             updated Examiner 1 on May 22, 2003, “I have not heard a peep from FR Empl 1      .” Exhibit 84.


                                                               61
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             DPP, WP, PII




June 3, 2003 E-mail from IA Examiner 1              to Hugh Wright, attached as Exhibit 87 at 2.
                              IA Examiner 1
        Wright forwarded                      update to Degenhardt and stated:
                DPP, WP




June 3, 2003 E-mail from Hugh Wright to Harold Degenhardt, attached as Exhibit 87 at
1-2.

        Degenhardt responded to Wright’s update on the unproductive discussions with
the Federal Reserve by querying, “This [is] all great, but what does it mean? Is this
something that we ought to go after or not?” Id. at 1. Wright responded by describing
the history of the matter as follows:

                   The decision not to go after it has been made in
                   Enforcement some time back, who then referred [it] to
                   Texas. As mentioned below, the Fed referred the matter to
                   the FBI DPP                                  Nothing has
                   changed since we referred it to Enforcement several months
                   ago to suggest that it would be an easier case now than
                   before. After our exam a couple of years ago, Stanford

                                                     62
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                   started filing Form Ds relying on Rule 506, although they
                   did so under protest. This would seem to make it difficult
                   to work a case for selling unregistered securities. If we
                   can’t go on that basis, then we would have to prove that
                   they are operating a Ponzi scheme which would be very
                   difficult, if not impossible, considering that, as far as I am
                   aware, there have never been any complaints by investors,
                   and all of the bank records and sales records are maintained
                   offshore in Antigua. In my opinion, there is nothing further
                   for us to do at this point.

 Id.

         At this point in time, it had been approximately six years since the SEC
 Examination staff had concluded that the SIB CDs were likely a Ponzi scheme. During
 that period, the SEC had conducted three examinations resulting in two Enforcement
 referrals; an Enforcement inquiry had been opened and closed with no meaningful effort
 to obtain evidence related to the Ponzi scheme; and the Examination staff had attempted
 to interest the Federal Reserve in investigating Stanford, to no avail. As discussed below,
 it would take almost another six years, another Examination and Enforcement referral,
 and the collapse of the Madoff Ponzi scheme before the SEC acted to shut down
 Stanford’s Ponzi scheme.

 V.          IN 2003, THE SEC ENFORCEMENT STAFF RECEIVED TWO
             COMPLAINTS THAT STANFORD WAS A PONZI SCHEME, BUT
             NOTHING WAS DONE TO PURSUE THOSE COMPLAINTS
                   Confidential Source
             A.                  in a Ponzi Scheme Case Filed By the SEC Noted Several
                   Similarities Between That Case and Stanford’s Operations
                                                                                            Confidential Source
         On August 4, 2003, the TSSB forwarded to Barasch a letter from
 that discussed Confidential Source concern that Stanford was operating a Ponzi scheme. See
 August 4, 2003 Letter from TSSB Empl 2                     to Spencer Barasch, attached as Exhibit 88; see
                                        Confidential Source
 also July 31, 2003 Letter from                                 to TSSB Empl 4           (the Confidential Source
 Letter”), attached as Exhibit 8 Confidential Source PII
PII
                                      . 42 See Exhibit 89. PII                     Letter discussed several

                                                             Confidential
 41
     Barasch told the OIG that he did not recall seeing theSource    Letter. Barasch Interview Tr. at 45-
 46. Barasch said the TSSB sent virtually every complaint it received to the SEC, and theConfidential Letter
                                                                                         Source
 would have been one of many complaints that he received from the TSSB. Barasch Interview Tr. at 46.
 42    PII

PII




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                                         PII
 “striking similarities” between the              Ponzi scheme and what was known at the
 time about Stanford’s operations. Id. The Confidential
                                           Source
                                                        Letter included the following
 information:
                 PII
                               was highly effective at avoiding regulatory
                  oversight, through a Byzantine corporate structure where
                  the funds from deposits were held in off shore entities, and
                  the US entities only provided “administrative services” to
                  the offshore entities. Furthermore, the people that solicited
                  the deposits were promoters employed by yet another
                  corporate entity, and these promoters were provided little
                  information about the financial wherewithal of the
                  companies accepting deposits. The PII            depositors
                  who thought they were investing in money markets and CD
                  instruments were told that their money was placed in
                  conservative interest-bearing instruments, and
                  unbeknownst to them, their deposits were used to fund
                  speculative investments … Beyond these speculative
                  investments, the funds were used to pay for the elaborate
                  corporate headquarters in San Antonio and the expense of
                  the promoters in the four offices in Mexico.
                  …
                                                         PII
                    Unfortunately, organizations like                continue until
                    they reach a point of illiquidity so severe that they can no
                    longer honor client withdrawals. At that time, the potential
                    recovery to investors is greatly impaired. In the case of
                PII
                                , barely $100 million of assets remained to
                    cover obligations exceeding $425 million. For the sake of
                    the Mexican investors, I hope that Stanford is not
                    constructed in the same manner as PII

 Id. The letter also contained a detailed chart listing the aspects of the two companies that
 were deemed to be similar. Id. at1.

            Before sending the Confidential
                                Source      Letter to the SEC, TSSB Empl 2
TSSB Empl 2
                             called Barasch to discuss the matter. TSSB Interview
  Memorandum at 5. TSSB Empl 2 told the OIG that becausePII                    was such a significant
                                            Confidential Source
  matter, he thought he needed to bring                         concerns regarding Stanford to the
  SEC’s attention. Id.TSSB Empl 2 stated that the SEC was a more appropriate body than the
  TSSB to investigate Stanford, because of the international aspect and because of the

 PII




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                                                                                      TSSB Empl 2
  significant amount of resources necessary to investigate the matter. Id.       told the
  OIG that during his phone conversation with Barasch, Barasch did not mention the
Complainant 1
              Letter that Barasch had supposedly sent to the TSSB in December 2002, nor did
  he mention that the SEC Examination staff had completed an examination and referred
  Stanford to the TSSB for enforcement action in December 2002. Id.

         Barasch forwarded the ConfidentialSource         Letter to ENF BC 2               a branch chief in
                                                 ENF BC 2
 the FWDO’s Enforcement group.                               Testimony Tr. at 9; see September 16, 2003
 E-mail from IA Examiner 1               to ENF BC 2                , Exhibit 91. ENF BC 2     had worked on
     PII
 the               matter.      ENF BC 2
                                                 Testimony Tr. at 16. In his OIG testimony, ENF BC 2
 acknowledged that the PII                        matter and the Stanford matter were similar. Id. On
                           IA Examiner 1
 September 16, 2003,                     e-mailed ENF BC 2        the 2002 Examination Report. Exhibit
 91. But, as discussed below, it appears that ENF BC 2                   did not read that report. See
 footnote 48.

          B.      An Anonymous Insider Warned That Stanford Was Operating “a
                  Massive Ponzi Scheme”

         On October 10, 2003, the NASD forwarded a letter dated September 1, 2003,
 from an anonymous 43 Stanford insider to the SEC’s Office of Investor Education and
 Assistance (“OIEA”) with the introduction, “We are referring [an] anonymous tip to your
 attention, since the parties mentioned are outside of our jurisdiction.” 44 See October 10,
 2003 E-mail from OIEA Staff       to Spencer Barasch, attached as Exhibit 93. On the
 same day, OIEA forwarded the anonymous letter to Barasch 45 with the introduction:

                  Below please find a referral from NASD concerning
                  Stanford Financial Group[46]. I am sending it to your office




 43
     The letter was sent by Leyla Basagoitia (now Leyla Wydler), a SGC financial adviser from 2000 to
 November 2002. See Wydler Interview Tr. at 4-8. Basagoitia told the OIG that she was fired by SGC in
 November 2002 because she refused to sell the SIB CDs to her clients. Id. at 7. As discussed below,
 Basagoitia contacted the SEC again in 2004 and was interviewed at least twice by the FWDO staff.
 44
      The NASD forwarded to the SEC the same anonymous letter a second time on October 20, 2003, with
 the introduction:
          Attached you will find a customer complaint submitted to NASD. After review, it was
          determined the products in question are not NASD-registered. We are forwarding this
          complaint to the SEC for review.
 October 20, 2003 E-mail from NASD to SEC, attached as Exhibit 92.
 45
     Barasch told the OIG that he did not recall seeing the anonymous September 1, 2003 complaint.
 Barasch Interview Tr. at 44-45.
 46
      SGC was a subsidiary of Stanford Financial Group (“SFG”). See Exhibit 70 at 3.


                                                     65
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                 for its consideration. There is nothing in NRSI for Stanford
                 Financial Group or Allen Stanford.

Id. at 1. The letter stated:

                 STANFORD FINANCIAL IS THE SUBJECT OF A
                 LINGERING CORPORATE FRAUD SCANDAL
                 PERPETUATED AS A “MASSIVE PONZI SCHEME”
                 THAT WILL DESTROY THE LIFE SAVINGS OF
                 MANY, DAMAGE THE REPUTATION OF ALL
                 ASSOCIATED PARTIES, RIDICULE SECURITIES
                 AND BANKING AUTHORITIES, AND SHAME THE
                 UNITED STATES OF AMERICA.

                 The Stanford Financial Group [SFG] of Houston, Texas has
                 been selling to people of the United States and of Latin
                 America, offshore certificates of deposit issued by Stanford
                 International Bank, a wholly owned unregulated subsidiary.
                 With the mask of a regulated US Corporation and by
                 association with Wall Street giant Bear Stearns, investors
                 are led to believe these CD’s are absolutely safe
                 investments. Not withstanding this promise, investor
                 proceeds are being directed into speculative investments
                 like stocks, options, futures, currencies, real estate, and
                 unsecured loans.

                 For the past seventeen years or so, Stanford International
                 Bank has reported to clients in perfect format and
                 beautifully printed material of the highest quality,
                 consistent high returns on the bank’s portfolio, with never a
                 down year, regardless of the volatile nature of the
                 investments. …

                 The questionable activities of the bank have been covered
                 up by an apparent clean operation of a US Broker-Dealer
                 affiliate with offices in Houston, Miami, and other cities
                 that clears through Bear Stearns Securities Corporation.
                 Registered Representatives of the firm, as well as many
                 unregistered representatives that office within the B-D, are
                 unreasonably pressured into selling the CD’s. Solicitation
                 of these high risk offshore securities occurs from the
                 United States and investors are misled about the true nature
                 of the securities.



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                     The offshore bank has never been audited by a large
                     reputable accounting firm, and Stanford has never shown
                     verifiable portfolio appraisals. The bank’s portfolio is
                     invested primarily in high risk securities, which is not
                     congruent with the nature of safe CD investments promised
                     to clients.
                     …

                     Unbelievable returns of the portfolio, non verifiable
                     portfolio appraisals, non prudent investment strategies,
                     information from insiders, and lavish expense management
                     styles, suggest the portfolio is deeply underwater. If true,
                     returns and expenses are being paid out of clients’ monies
                     and by the size of the portfolio this would be one of the
                     largest Ponzi Schemes ever discovered.

                     This letter is being written by an insider who does not wish
                     to remain silent, but also fears for his own personal safety
                     and that of his family. The issue is being referred for
                     investigation to the proper authorities, related parties, and
                     persons whose mission is to inform the general public. The
                     key point to focus on is the real market value of Stanford
                     International Bank’s investment portfolio, which is
                     believed to be significantly below the bank’s obligations to
                     clients. Overlooking these issues and not thoroughly
                     investigating them is becoming an accomplice to any
                     wrongdoing.

September 1, 2003 Letter to the NASD Complaint Center, attached as Exhibit 94,
(emphasis in original).
                                                                                 ENF BC 2
       On October 10, 2003, Barasch forwarded the referral letter to            and
copied Jeffrey Cohen, an Assistant Director in the FWDO Enforcement group. Exhibit
93. Barasch asked ENF BC 2   , “Let me know what you think of this situation. Recall, I
previously sent you another rferral [sic] on this outfit.” Id. ENF BC 2 responded on
October 12, 2003:
                                                         Confidential Source
                     I have the previous referral from
               PII
                                                          It didn’t provide much
                  solid information about securities violations. I also spoke
                  with IA Examiner 1       who did the most recent exam.
                 IA Examiner 1
                               gave me a copy of his report. I have not reviewed
                  it thoroughly yet. The main problem appears to be that the
                  actual solicitations are made from representatives of an
                  offshore bank (to purchase a CD from that bank), and NOT

                                                   67
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                       from Stanford reps (though Stanford reps refer investors to
                       the offshore bank - not sure if there’s a referral fee). I’ll
                       read the attached referral and let you know what I find.

Id. 47
                                        ENF BC 2
          On October 30, 2003,                  updated Barasch, “I have [Enforcement staff
            ENF Staff Atty 2
attorney]                    checking into it. He and I will be speaking with [the Examination
staff]IA Examiner 1 again about their exam.” Exhibit 92. On November 4, 2003, ENF BC 2         e-
mailed Cohen:
                                            ENF Staff Atty 2
                       I’m meeting with               and IA Examiner 1    at
                       10:00 a.m. on a matter forwarded to us by Spence
                       [Barasch], Stanford Financial (offshore CDs sold to
                       Mexican investors, but with a Houston connection). It may
                       or may not become a MUI.
                                           ENF BC 2
November 4, 2003 E-mail from                                               to Jeffrey Cohen, attached as Exhibit
95.
          ENF Staff Atty 2
                      testified that either Barasch, ENF BC 2     , or Cohen asked him to look at
the anonymous letter to see what public information was available concerning Stanford.
ENF Staff
Atty 2    Testimony Tr. at 11-12 ENF2Staff testified: “It was, as Spence Barasch used to call it, a
                                 Atty

tire kicker, something to look over” and was not a priority matter. Id. ENF2Staff stated that he
                                                                              Atty

spent approximately one day reading newspaper articles and other public documents
concerning Stanford. Id. at 12.
          ENF Staff                                                 ENF BC 2
          Atty 2   testified that when he reported to           what he had found in those
public documents, ENF BC 2          told him “pretty much right off the bat, don’t worry about it,
it’s going to [the examinations group]. We’re not going to work this [as an] enforcement
[case].”ENF2Staff Testimony Tr. at 14-17.ENF2Staff testified that he believed that Barasch and/or
         Atty                                Atty

Cohen would have made the decision not to open an enforcement inquiry for Stanford at
this time. ENF2Staff Testimony Tr. at 15.
              Atty


                             ENF BC 2                                                   IA Examiner 1 IA Examiner 2
            According to             handwritten notes, he met with                  and
ENF Staff
Atty 2    regarding SGC on November 5, 2003. See ENF BC 2     Notes, attached as Exhibit 96
 at 1. ENF BC 2      notes also indicate that SGC was discussed again on November 7, 2003,
 during a meeting with Cohen and Barasch and a decision was made to “[l]et B/D exam go
47   ENF BC 2                                                                                                     ENF BC 2
                testified that he had no recollection of ever reading the 2002 Examination Report.
Testimony Tr. at 16. In the October 12, 2003 e-mail referenced above, he stated that he had not “reviewed
[the report] thoroughly.” Exhibit 93. He also stated that he was “not sure if there’s a referral fee” for the
“Stanford reps refer[rals] [of] investors to the offshore bank.” Id. However, the referral fees are
prominently discussed in the 2002 Examination Report. Exhibit 70 at 1, 3, 6-7 and 11. For example, the
“Summary of Violations” section discussed the referral fees on the first page of the report. Id. at 1.


                                                               68
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    Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


    forward. Then if nothing – Memo to file.” Id. at 2. ENF BC 2      testified that he recalled
    discussing Stanford with Cohen and Barasch, and “I think we recognized, obviously,
    what was being represented on these CDs that were being offered by Stanford looked
    suspicious, just because of the – I think the consistently high returns that were being put
    together with the claim that it was safe and secure.” ENF BC 2    Testimony Tr. at 17-18.
                ENF BC 2
                         testified that the discussions regarding Stanford primarily concerned
     whether the SIB CDs were securities, whether there were any U.S. investors, and whether
     documents could be obtained from SIB in Antigua. 48 Id. at 17-19 ENF2Staff testified that
                                                                           Atty

     Cohen had expressed his view that the SEC would not be able to prove a fraud case
     because the SEC could not compel documents from SIB. ENF2Staff Testimony Tr. at 17.
                                                                   Atty
  ENF Staff
  Atty 2    also recalled that Cohen had DPP, WP
                 49
  DPP, WP
                    Id.
              ENF BC 2
                       explained the Enforcement staff’s rationale for not investigating
    Stanford at that time as follows:

                             [R]ather than spend a lot of resources on something that
                             could end up being something that we could not bring, the
                             decision was made to – to not go forward at that time, or at
                             least to – to not spend the significant resources and – and
                             wait and see if something else would come up.
   ENF BC 2
                    Testimony Tr. at 19.

                    It is not clear what the Enforcement staff hoped to gain by “wait[ing] [to] see if
      something else would come up” after the SEC had conducted three examinations of SGC
      finding that the SIB CDs were probably a Ponzi scheme; received a letter from a relative
      of a investor concerned about the legitimacy of those CDs; received a letter from a
Confidential Source
                     in another Ponzi scheme case concerned about the similarities between his case
      and Stanford; and received an anonymous letter from a Stanford insider telling the SEC
      that Stanford was operating a “massive Ponzi scheme.”

            It is also not clear what purpose the Enforcement staff thought would be served by
    having the examiners conduct a fourth examination of SGC. But, as discussed below, a
    fourth examination of SGC was conducted approximately one year later. Preuitt testified
    48   ENF BC 2
                   did not recall whether anyone from the FWDO contacted the SEC’s Office of International
    Affairs (“OIA”) at this time regarding how to obtain SIB’s records in Antigua. Id. at 28-29. Neither the
    OIG nor OIA could confirm that OIA was ever contacted by the Enforcement staff about Stanford before
    Prescott’s contact, discussed below, in October 2004. See Exhibits 64 and 97.
    49                     ENF BC 2
          In addition,            testified that the anonymous nature of the September 1, 2003 complaint “made it
    a little more difficult to prove whether what they’re saying is – is true.”ENF BC 2   Testimony Tr. at 19.
    Wright also noted that the anonymous nature of the complaint made it difficult to obtain further
    information. Wright Testimony Tr. at 37.


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that at the outset of that examination she “was very anxious about doing it because I
didn’t think that anything had changed so that we would necessarily be more effective
than the past in terms of being able to get a case done.” January 26, 2010 Preuitt
Testimony Tr. at 8. However, that examination, combined with a change in senior
management, did finally result in the opening of an Enforcement investigation.

VI.       IN OCTOBER 2004, THE EXAMINATION STAFF CONDUCTED A
          FOURTH EXAMINATION OF SGC IN ORDER TO REFER STANFORD
          TO THE ENFORCEMENT STAFF AGAIN

          A.      The Examination Staff Was Alarmed at the Increasing Size of the
                  Apparent Ponzi Scheme, and Accordingly, Made Another
                  Enforcement Referral of Stanford a “Very High Priority”

        By October 2004, approximately seven years since the SEC’s first examination of
SGC, its revenues had increased four-fold and sales of the SIB CDs accounted for over
70 percent of those revenues. See Broker Dealer Examination Report for Stanford Group
Company, dated December 2, 2004 (the “2004 Examination Report”), attached as Exhibit
98, at 2. That growth, combined with the “prior examination findings,” prompted the
Examination staff to prepare a third Enforcement referral of Stanford. 50 Id. Wright
acknowledged his frustration that his staff had examined SGC multiple times and found
that the potential fraud was growing, but Enforcement would not pursue the matter.
Wright Testimony Tr. at 31. However, according to Prescott, making another attempt to
convince Enforcement to pursue Stanford was “a very high priority” for Wright in
October 2004. 51 Prescott Testimony Tr. at 84. Moreover, Prescott testified, “Everyone
[on the examination staff] wanted to see the case worked.” Id.

      Consequently, in October 2004, the B-D Examination staff initiated another
examination of Stanford solely for the purpose of making another Enforcement referral.
See Exhibit 98 at 2. Preuitt assigned BD Exam BC 2 and BD Examiner 1 to the 2004 SGC




50 BD Exam BC 1
                     , a branch chief assigned to the 2004 SGC exam, testified that the Examination staff
was concerned about the growth in Stanford’s revenues BD Exam BC 1 Testimony Tr. at 12-13.
51
    On December 15, 2004, less than two weeks after the staff completed the 2004 Examination Report,
Preuitt e-mailed the examiners who conducted the exam, “I just spoke with Hugh [Wright]. He is very
concerned about Stanford and for good reason. I need a memo prepared which provides a brief summary
regarding what we believe the problems are there and what documents they have not produced.” See
December 15, 2004 E-mail from Julie Preuitt toBD Exam BC 2 , attached as Exhibit 99.


                                                   70
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  Examination. 52 Preuitt described the genesis of this examination as follows:

                     I was having a planning meeting with Mr. Hugh Wright
                     regarding what the [exam] schedule would look like for the
                     2005 fiscal year and … he thought it was very important
                     that we do Stanford Financial Group in the upcoming year.
                     … I was very anxious about doing it because I didn’t think
                     that anything had changed so that we would necessarily be
                     more effective than the past in terms of being able to get a
                     case done, so we had a discussion to that effect and Mr.
                     Wright was adamant that it was the right thing to do and we
                     needed to go do it. And not that I disagreed with him, but
                     he was sort of asking me to go to battle [with
                     Enforcement], … and it was going to take a lot of energy
                     and resources and so we talked a lot about that and decided
                     that … the affected investors needed to be served and so
                     this was how we needed to do it.

  January 26, 2010 Preuitt Testimony Tr. at 8. Preuitt testified that the Examination staff’s
  intention at the outset of the examination was to refer Stanford again to Enforcement. Id.
  at 8-9. In fact, the sole purpose of conducting the examination was to support an
  enforcement referral. BDExaminer 1 Testimony Tr. at 40.



          In October 2004, essentially at the same time that the 2004 Examination began,
  Victoria Prescott joined the Examination group as Special Senior Counsel to the FWDO
  B-D Examination staff. 53 Prescott immediately began working on creating a separate
  referral, tailored for Enforcement staff, while the examiners were preparing their report.
  Prescott explained that the Examination staff’s practice prior to her joining the group had
  been to simply provide a copy of its Examination report to the Enforcement staff when
  making a referral. Prescott Testimony Tr. at 41-42. She testified that her purpose in
  creating this separate, specifically-tailored Enforcement document for the Stanford

                                         BD         BD
  52                                     Exam       Examiner
        Preuitt testified that in assigning
                                         BC 2  and  1     to conduct the Stanford exam, she “chose the two
   people that I thought had the most experience and were likely the most capable examiners on staff ….”
   January 26, 2010 Preuitt Testimony Tr. at 13. During her OIG testimony, Preuitt descri            th as
   “extraordinarily capable staff.” Id. In an April 8, 2005 e-mail toENF Asst Preuitt describedBD Ex and BD Exmnr as
                                                                      Dir 1                    BC 2       1
   “awesome.” See April 8, 2005 E-mail from Julie Preuitt to ENF Asst Dir 1 , attached as Exhibit 100 at 2.
BD Exam BC 1  testified that she was “very impressed” with BD Exam and that she thought that BD and BD Examiner 1
                                                           BC 2                              Exam
   were a very strong team. BD Exam BC 1 Testimony Tr. at 9                                  BC 2

  53
       Prescott had approximately thirteen years of experience as a branch chief and two years experience as
  a staff attorney in the FWDO Enforcement group. Prescott Testimony Tr. at 7-9. She was appointed to the
  newly-created Special Senior Counsel position to the FWDO B-D Examination staff in October 2004. Id.
  Her primary function as Special Senior Counsel was to assist the broker-dealer Examination staff refer
  matters to Enforcement. Id. at 11. Stanford was the first matter that Prescott worked on in her new
  position. Id. at 12, 18.


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referral was to increase the likelihood that Enforcement would pursue the matter. Id. at
42.

       The Examination staff began its field examination work of Stanford on October 4,
2004, and concluded that work on October 8, 2004. See Exhibit 98. The staff completed
the 2004 Examination Report on December 2, 2004. Id.

        B.        The 2004 Examination Report Concluded That the SIB CDs Were
                  Securities and Were Part of a “Very Large Ponzi Scheme”

        In its 2004 Examination Report, the Examination staff concluded:

                  Since the firm is engaged in the same activities [that were
                  of concern in 1997] we believe SGC to be a high regulatory
                  risk with regard to sales practice issues.
                  …

                  [T]he Staff is concerned that the offering of the SIB CDs
                  may in fact be a very large ponzi scheme, designed and
                  marketed by SIB’s [sic] and SGC’s [sic] to lull investors
                  into a false sense of security by their claims that the SIB
                  products are similar to traditional U.S. bank CDs.
             BD Exam
Id. at 3, 16 BC 2 testified that there were a lot of red flags associated with SGC’s sales
of the SIB CDs, including the returns and the referral fees, that led him to believe they
were a Ponzi scheme. BD Exam Testimony Tr. at 19-20.
                      BC 2



       The Examination staff also concluded that the SIB CDs were securities. The 2004
Examination Report discussed the Examination staff’s basis for that conclusion as
follows:

                  The Staff believes that the SIB issued securities, which are
                  marketed as certificates of deposit (“SIB CD” or “CD”), are
                  CDs in name only and are claimed to be CDs as part of an
                  overall scheme to evade federal regulation and to lull
                  investors into believing that the safety of these securities is
                  comparable to CDs issued by a United States bank.

                                                  ***

                  Obviously, unlike a traditional certificate of deposit, SIB
                  CDs are subject to risk. In fact, an SIB disclosure document
                  makes the statements that “the ability of SIB to repay
                  principal and interest on the CD Deposits is dependent on
                  our ability to successfully operate by continuing to make

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                 consistently profitable investment decisions” and “You
                 may lose your entire investment (principal and interest)….”

                 The Staff could discern no legitimate reason to refer to
                 these investments as CDs. Instead, they appear to be
                 referred to as CDs to lull investors into believing that the
                 product offers the safety of a conventional certificate of
                 deposit and to circumvent U.S. federal securities laws
                 requiring registration.

Exhibit 98 at 3, 6 (second ellipsis in original).

        The Examination staff further concluded that SGC’s sales of the SIB CDs violated
numerous federal securities laws. For example, the 2004 Examination Report discussed
the staff’s conclusion that SGC was violating the NASD’s suitability rule as follows:

                 The NASD requires that in recommending to a customer
                 the purchase of any security, the member firm shall have
                 reasonable grounds for believing that the recommendation
                 is suitable as to the customer’s financial situation and
                 needs. Since SGC and its representatives do not have the
                 information available to determine the actual investments
                 made with the investors’ funds and the risk level of the SIB
                 CDs, it cannot know if the product is suitable as to its
                 customer’s needs. Furthermore, not only is there no
                 specific information available, the information that is
                 available is highly suggestive of a fraudulent offering
                 which would be inherently unsuitable for any investor.

Id. at 10-11.BD Exam testified that he had also been “troubled” by the fact that SGC kept
             BC 2
changing its excuses as to why it did not have information about SIB’s portfolio. BD Exam
                                                                                     BC 2

Testimony Tr. at 19-20.

         In addition to possible violations of the NASD’s suitability rule, the 2004
Examination Report identified several other apparent violations of the federal securities
laws by SGC, including: (1) material misstatements and failure to disclose material facts,
in violation of Rule 10b-5 of the Securities Exchange Act of 1934 (“Exchange Act”);
(2) failure to disclose to customers its compensation for securities transactions, in
violation of Rule 10b-10 of the Exchange Act; and (3) possible unregistered distribution
of securities in violation of Section 5 of the Securities Act of 1933 (“Securities Act”).
See Exhibit 98 at 1.

        The 2004 Examination Report advocated that the SEC act against SGC for these
violations, in part, because of the difficulties in proving that SIB was operating a Ponzi
scheme. Id. at 3. BD Exam testified that after the 2004 Examination he believed it was
                   BC 2



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                                                                                      BD Exam
incumbent on the SEC to do whatever it could to stop the growing fraud. BC 2
Testimony Tr. at 28. The Examination staff made its case for that course of action as
follows:

                 The Staff also suspects that ultimately little, if any, of the
                 funds invested into the SIB CDs may actually be invested
                 as represented to investors. This suspicion is fueled by
                 SGC’s apparent inability and SIB’s refusal to provide
                 requested documents regarding the CDs, including the
                 actual uses of the monies raised. Since SIB is located in
                 Antigua, and the securities in question are not registered,
                 we have been unable to require SIB to provide or to
                 otherwise gather the necessary documents to either verify
                 or allay those suspicions.

                 Although it may be difficult to prove that the offering itself
                 is fraudulent, SGC has nonetheless committed numerous
                 securities law violations which can be proved without
                 determining the actual uses of the invested funds.
                 Violations include making misrepresentations and
                 omissions to customers, charging excessive commissions,
                 and failing to disclose the amount of commissions charged.
                 SGC also violated several other SEC and SRO Rules
                 regarding books and records, supervision and anti-money
                 laundering.

Exhibit 98 at 3.

        At this juncture, the FWDO Examiners had tried without success for seven years
to persuade the Enforcement staff to investigate Stanford. In October 2004, they
conducted a fourth examination with the sole purpose of making another Enforcement
referral. As discussed below, this time the Examination staff took several investigative
steps beyond the examination itself hoping to make the matter more palatable for the
Enforcement staff to pursue. Those steps, combined with a change in senior
management, did result in the opening of an Enforcement investigation in April 2005.
However, for the next six months, most of the staff’s energy was spent debating about
whether to pursue the matter.

        C.       The Examination Staff Conducted Significant Investigative Work
                 During the Six Months From October 2004 Through March 2005 to
                 Bolster Its Anticipated Enforcement Referral

       Prescott had begun working on the Enforcement referral of Stanford in October
2004, and spent several months doing additional investigative work beyond that
conducted as part of the examination process while preparing the referral. Prescott

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testified that her purpose in doing so was to maximize the chance that Enforcement
would pursue the matter. Prescott Testimony Tr. at 41-42.
                                  BD Exam
        At Prescott’s request,BC 2 analyzed the improbability of the CDs’ returns using
data about the past performance of the equity markets. Prescott Testimony Tr. at 62-63;
see also March 14, 2005 Draft Memorandum from Victoria Prescott to Spencer Barasch
(the “2005 Enforcement Referral”), attached as Exhibit 101 at 8. Prescott also reached
out to the SEC’s Office of Economic Analysis (“OEA”) for assistance in taking the
Examination staff’s quantitative analysis of Stanford’s historical returns “a step further.”
Prescott Testimony Tr. at 63-64. Prescott explained:

                 I was interested in … trying to get a way of converting our
                 intuitive concerns about the rates of return in light of what
                 the markets were doing to something that could be used as
                 evidence. I was hoping that the Office of Economic
                 Analysis could do some number crunching to help us with
                 that.

Id. at 57.

       Prescott testified that it would have been “helpful” if OEA had done analysis,
such as a macroanalysis, and confirmed that the returns seemed highly improbable or
suspicious. Id. at 62. However, OEA did not assist the Enforcement staff with any
analysis of Stanford’s returns. Id. at 64-65.
                               OEA 1
         Prescott contacted             , PII                                 in April
2005 concerning Stanford. Prescott Testimony Tr. at 65. According to Prescott’s notes
of an April 26, 2005, telephone call withOEA 1 she provided OEA 1 some details
concerning SIB’s reported earnings on investments in comparison with global equity
market indices. April 26, 2005 Prescott notes, attached as Exhibit 102; Prescott
Testimony at 57, 65. According to Prescott’s notes OEA 1 told her that he was very busy
and could not say when he would get to the Stanford matter. See Exhibit 102. Prescott
testified that she was unaware of any analysis ever provided by OEA on the Stanford
matter. Prescott Testimony Tr. at 64-65.
                                                                          ENF BC 3
        According to an April 19, 2005 e-mail from Prescott to                    , a branch
                                                                                 ENF BC 3
chief in Enforcement who, as discussed below, was assigned to the matter,                 may
have also had contact with OEA 1 about the Stanford matter. See April 19, 2005 E-mail
from Victoria Prescott to ENF BC 3      , attached as Exhibit 103. ENF BC 3 testified that he did
not remember OEA providing any analysis, but that it would have been helpful to have
had someone in OEA give an expert opinion as to the improbability of the Stanford
returns.ENF BC 3 Testimony Tr. at 27-28. OEA 1 told the OIG that he had no recollection of
ever discussing the Stanford matter with FWDO Enforcement staff. SeeOEA 1 Interview
Memorandum.


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          It is possible that the Enforcement investigation may have been advanced had
  OEA responded to the request for some expert analysis of Stanford’s claims. After
  reviewing Prescott’s analysis of those claims in the 2005 Enforcement referral, RSFI 2
RSFI 2    PII
                                      in the Division of Risk, Strategy, and Financial
  Innovation (“RSFI”), stated unequivocally that DPP, WP
 DPP, WP                                               RSFI 2
                                                              Interview Memorandum. RSFI 2
  stated, DPP, WP                                                         Id. RSFI 2 stated that
  it should have been “very easy” to perform a quantitative evaluation of the plausibility of
  SIB’s reported returns by running various computer models. Id.
DPP, WP, PII




DPP, WP, PII                                                 DPP, WP
                                                        55
DPP, WP



                                                                   OIA Atty 1
         On October 18, 2004, Prescott contacted                   , an attorney in OIA, for
 information regarding Antigua’s regulation of Stanford. 56 See October 18, 2004 E-mail
 from Victoria Prescott to OIA Atty 1    , attached as Exhibit 97 at 2-3. Prescott sought
 that information because it was relevant to the jurisdictional issue of whether the Stanford
 CDs were securities. Id. Prescott also contacted OIA in January 2005 for information
 about SIB’s London auditor. See January 6, 2005 E-mail from Victoria Prescott to OIA Atty 3

 54
       RSFI was created as a Division in 2009 and includes the group that was formerly OEA.
 55
       The paragraph Berman referred to stated:
               Further, SIB’s annual audit casts doubt upon its claims of consistent profitability over the
               last 20 years. For example, from 2000 through 2002, SIB reported earnings on
               investments of between approximately 12.4% and 13.3%. This return seems remarkable
               when you consider that during this same time frame SIB supposedly invested at least
               40% of its customers’ assets into the global equity market. Ten of 12 global equity
               market indices were down substantially during the same time frame. The indices we
               reviewed were down by an average of 11.05% in 2000, 15.22% in 2001 and 25.87% in
               2002. It is equally unlikely that the portion of the portfolio invested into debt instruments
               (approximately 60%) could make up the expected losses in the equity portion of the
               portfolio. For example, in 2002, when the global indices were down 25%, the debt
               portion of the portfolio would have to generate an approximately 40% return for SIB to
               generate the 12.4% overall return it claimed in 2002.
 Exhibit 101 at 5 (footnote omitted) (emphasis in original).
 56
      Prior to Prescott’s contact, the OIG investigation found no evidence that any of the Fort Worth
  examination or enforcement staff had ever asked OIA for assistance in connection with the previous
  examinations and enforcement referrals.


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 OIA Atty 3
        , attached as Exhibit 104. Prescott was “suspicious” about the legitimacy of the
 auditor and the integrity of its audit of SIB. Id.

              Preuitt testified with reference to Prescott’s contact with OIA:

                       [W]e made a decision that we were going to go ahead and
                       start with like the preliminary steps of an investigation and
                       not end it where an examination typically did. And
                       Victoria [Prescott] had a lot of experience in this and she
                       thought it was one of the places to go and basically start the
                       investigation.

 January 26, 2010 Preuitt Testimony Tr. at 38.

         On December 20, 2004, Prescott interviewed Leyla Basagoitia, a former
 registered representative of SGC. 57 See Notes of December 20, 2004 Interview, attached
 57                                                                                         Exam Sr Cnsl
        Basagoitia first contacted the SEC on or around October 27, 2004. On that date,                    ,
  senior counsel in the FWDO’s Examination group, whose duties at that time included handling complaints
  from the public, spoke with Basagoitia. Exam Sr Cnsl Testimony Tr. at 8-9; October 27, 2004 E-mail from
Exam Sr Cnsl           to BD Exam BC 1      , attached as Exhibit 105. According to an October 27, 2004 e-mail
  from Exam Sr Cnsl toBD Exam BC 1 Basagoitia told him that she was terminated by SGC because she would not
  sell the SIB CDs and because she told SGC that the CDs were not suitable investments. See Exhibit 105.
  Basagoitia toldExam Sr Cnsl that she could identify other SGC representatives who were terminated for the
  same reason. Id. Basagoitia also told Exam Sr Cnsl that she believed that the CDs were a Ponzi scheme. Id.
       Basagoitia told the OIG that during her conversation with Exam Sr Cnsl , he responded:
              … something along the way like, oh, we don’t want any blood on the street. What he
              meant by that I don’t know, to tell you the truth. What it seemed to me or my
              understanding was like maybe we’re going to investigate; or maybe, you know, you
              can’t, unless a client or a customer loses money and calls the SEC then, you know, the
              SEC does something about it.
 Wydler Interview Tr. at 10-11.
      Exam Sr Cnsl                                                                                 Exam Sr Cnsl
                  testified that he thought that Basagoitia was credible when he spoke to her.
 Testimony Tr. at 14. Exam Sr Cnsl     October 27, 2004 e-mail to BD Exam BC 1 stated, “Based on our meeting last
 week and my conversation with this woman,DPP, WP                                                           In
 addition, it’s reasonable to conclude at this point that the Stanford Group is at least a co-issuer on these
 CD’s.” See Exhibit 105.
       On November 18, 2004, Basagoitia sent Exam Sr Cnsl an e-mail that stated, in part:
              Here are more observations regarding Stanford Group:
              …
              3. Clients never talk to people at the Bank. They only deal with their Reps and
              operations people in Houston. Clients are led to believe the bank is a subsidiary of a
              regulated US corporation.
              4. Management promotes contests among Reps and offices in the US to raise assets for
              the Bank. Winners are handsomely paid. I was offered a trip to Antigua.
              (Footnote continued on next page.)

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as Exhibit 107. Prescott’s notes of that interview evidence that Basagoitia told her that
the sale of SIB’s CDs was a “Ponzi scheme.” Id. at 1. Basagoitia also told Prescott that
she believed that SIB “should disclose what [its] portfolio is at any time to investors.” Id.
Basagoitia complained that SIB:

                       Never want to show the portfolio—invest in currency,
                       stocks bonds, options
                       She asked to see the portfolio—told it was proprietary info
                       and do not show it
                       …

                       Investors think the investment is very safe; in reality,
                       investing in very risky investments; stocks, bonds currentcy
                       [sic]—she saw reports

Id. Prescott described the information she obtained from Basagoitia as follows:

                       The most useful information that she gave was giving me
                      Stanford Empl 4
                                     name, and I think there was another fellow
                       named Stanford Empl I followed up and called all the people
                              3
                       whose names she gave me, and I found them more helpful.
                       They were -- they had a broader understanding, and Leyla
                       had made up her mind that this was -- that Stanford was a
                       problem, but she couldn’t really relate evidence. I don’t
                       think she had any. She had her conclusion, and her
                       approach to it was sort of ipso facto that it must be, and I
                       could never get details from her that I would consider really
                       useful from an evidentiary standpoint.

Prescott Testimony Tr. at 33-34.
                                        Stanford Empl 4
       Prescott interviewed          , one of the two former SGC registered
representatives who Basagoitia identified, on December 28, 2004, and January 6, 2005.

               …
               7. Some of the highest producers for the bank are unlicensed people that solicit from
               the B-D offices in Houston, such as Stanford Empl 5  who offices in Houston and has no
               securities license.
               8. Most Clients open accounts because they believe the B-D’s clearing agreement with
               Bear Stearns provides them with account protection. They also believe in the soundness
               of US laws. Should the Bank not have US representation, clients would not invest as they
               do at the Bank.
November 18, 2004 E-mail from Leyla Basagoitia to Exam Sr Cnsl     , attached as Exhibit 106.
Exam Sr Cnsl
        forwarded Basagoitia’s e-mail to Prescott on December 22, 2004. Id.


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See December 28, 2004 Notes, attached as Exhibit 108; January 6, 2005 Notes, attached
as Exhibit 109. According to Prescott’s notesStanford told her that he had been “forced to
                                                   Empl 4
offer it under extreme pressure from Stanford.” Exhibit 108 at 1.Stanford also told Prescott
                                                                     Empl 4
that “[t]he firm would not reveal to registered reps how the money was invested” (see
Exhibit 109 at 2) and that “a lot of smoke and mirrors” surrounded the SIB CDs (see
Exhibit 108 at 1). 58 Stanford told Prescott that SGC was “very touchy about [the SIB CDs]
                      Empl 4

not being called a security,” but that he had heard the firm had received “an opinion from
a noted former NASD[] or SEC att[orne]y that it was a security.” Id.Stanford believed that
                                                                            Empl 4

the SIB CD offering was a fund. Id.
                                   Stanford     Stanford
        Prescott testified thatEmpl 4 and Empl 3 also did not have any concrete “evidence,”
but they provided “a better idea [than Basagoitia] of … how things were handled from
the perspective of someone inside the firm.” Prescott Testimony Tr. at 36. Prescott
described this information as “a starting point.” Id.

         D.       In March 2005, Barasch and Degenhardt Learned of the Examination
                  Staff’s Work on Stanford and Told Them That it Was Not a Matter
                  That Enforcement Would Pursue

       Prescott told the OIG that Preuitt asked her to make a presentation about her
ongoing work on Stanford at a March 2005 quarterly summit meeting attended by the
SEC, NASD, and state regulators from Texas and Oklahoma. 59 Prescott Interview Tr. at
9-11. According to Preuitt, who also attended the meeting, Barasch “looked … annoyed”
during Prescott’s presentation. Preuitt Interview Tr. at 7.

      Immediately after her presentation, Prescott recalled that she got “a lot of
pushback” from Barasch and Degenhardt. Prescott Interview Tr. at 8. Prescott stated

58
     Prescott also interviewed Stanford Empl 3 , another former SGC registered representative who
Basagoitia identified, on January 11, 2005. See January 11, 2005 Notes, attached as Exhibit 110. Stanford Empl 3
told Prescott that “[t]he operations of [SIB] are not transparent.” Id. at 1.
59
    Denise Crawford, Texas State Securities Commissioner, told the OIG that she believed that the TSSB
and SEC staff may have discussed their mutual concern about Stanford as early as the late 1990s at these
quarterly meetings designed to foster cooperation and “share information” between the SEC and state
regulators. TSSB Interview Memorandum at 1-3. Crawford explained that the TSSB had examined SGC
in May 1997 in part because of the similarities between SGC and PII         . Id. at 1.
     During a Texas state budget hearing on February 20, 2009, Crawford stated that the TSSB had referred
Stanford to the SEC ten years ago. See Roma Khanna, Past probes sought to tie Stanford to drugs,
February 20, 2009, attached as Exhibit 111 at 2. We found however that, there was no referral from the
TSSB to the SEC. Crawford and TSSB Empl 1       , PII                                  , confirmed that the
TSSB staff has no record or recollection of a referral by the TSSB to the SEC having been made before, as
discussed above, the TSSB forwarded theConfidential letter to the SEC in August 2003. TSSB Interview
                                         Source
Memorandum at 3-4 TSSB Empl 1 Interview Memorandum. Crawford told the OIG that the mutual,
information-sharing discussions which may have occurred at the quarterly meetings in the late-1990s were
the communications between the TSSB and the SEC concerning Stanford in the 1990s, to which she was
referring. Id. at 3-4.


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that while she was “still standing in the room where the presentation had been made,”
Barasch and Degenhardt approached her and “summarily told [her] … it was not
something they were interested in.” Id. at 9-10; see also Prescott Testimony Tr. at 39-40.
Prescott felt “blindsided” when Barasch and Degenhardt told her that Stanford “was not
something that they wanted to pursue, that they had looked at [it] before.” Prescott
Interview Tr. at 10. She was “really taken by surprise that [Barasch and Degenhardt]
would have already formed an opinion and that their minds appeared to be closed to it.”
Id. Prescott explained further:

                  It was a very perfunctory conversation, and it was very -- it
                  was not a matter for -- it was not up for discussion. I was
                  being told. … And, you know, I just -- I felt a little bit – I
                  don’t know, I felt like I’d been put in an awkward position.
                  … I had no idea what all had gone on, apparently, and here
                  I though I’d turned in a good piece of work and was talking
                  about it to significant players in the regulatory community,
                  and I no sooner sit down, shut up and the meeting ended,
                  but then I got pulled aside and was told this has already
                  been looked at and we’re not going to do it.

Id. at 12. See also Prescott Testimony Tr. at 44-45, 56-58. Preuitt described
Degenhardt’s and Barasch’s “dismissive” reaction to Prescott’s presentation as “very
disheartening.” January 26, 2010 Preuitt Testimony Tr. at 33. 60

VII.     IN APRIL 2005, IMMEDIATELY AFTER BARASCH LEFT THE SEC,
         THE EXAMINATION STAFF REFERRED STANFORD TO
         ENFORCEMENT

        Preuitt testified that because Barasch had made it “very clear … he wasn’t going
to accept [the Stanford referral]” at the March 2005 meeting, the Examination staff
“waited till after he left the Commission … to go ahead and refer it over.” Preuitt
Interview Tr. at 7-8; see also, id. at 13 (“[W]e waited until after [Barasch] left to actually
send over the enforcement memo” in order “to avoid a repeat of before.”).
                                                  ENF Asst Dir 1
       On April 5, 2005, Preuitt e-mailed            , an Assistant Director in
Enforcement, the most recent draft of Prescott’s referral memorandum – a March 14,
2005 Draft Memorandum from Victoria Prescott to Spencer Barasch 61 (the “2005
60
     Barasch told the OIG that he had attended the March 2005 meeting with other regulators, but that he
had “no recollection” of Prescott’s presentation or a conversation with her about that presentation. Barasch
Interview Tr. at 49-50.                                               ENF
61                                                                   Asst Dir
    The March 14, 2005 draft referral memorandum that Preuitt sent 1      was addressed to Barasch. See
Exhibit 101. On March 9, 2005, the SEC announced Barasch’s departure. See SEC Press Release No.
2005-34 (March 9, 2005), attached as Exhibit 112. Barasch’s last day at the SEC was April 14, 2005. See
SEC personnel record, attached as Exhibit 113.
         (Footnote continued on next page.)

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Enforcement Referral”), attached as Exhibit 101; see April 5, 2005 E-mail from Julie
Preuitt to ENF Asst Dir 1 , attached as Exhibit 114 at 3. Preuitt’s e-mail toENF Asst stated:
                                                                             Dir 1



                  Victoria [Prescott] put this together. I think it does a great
                  job of summarizing our concerns. It has been looked at by
                  Hugh [Wright], but not by anybody in enforcement.

                  I don’t think we can get the Bank (be clear when you read),
                  but I do think that we can get the [broker-dealer] which will
                  ultimately get the Bank. A LOT of money involved.

Id.

         The 2005 Enforcement Referral began with the following:

                  An October 2004 examination of Commission-registered
                  broker-dealer SGC, headquartered in Houston, Texas, has
                  uncovered evidence suggesting that SGC and its affiliated
                  company Stanford International Bank (“SIB”) may be
                  violating the securities laws. Specifically, we are
                  concerned that:
                      •    SGC is selling unregistered securities, possibly
                           without a valid exemption;
                      •    SGC and SIB are making misrepresentations and/or
                           inadequate disclosures regarding the unregistered
                           offering(s), most notably to foreign investors;
                      •    SIB may be engaging in a fraudulent scheme
                           (possibly either a money laundering and/or a Ponzi
                           scheme) through the sales of the unregistered
                           securities, and refuses to provide the staff with
                           sufficient information to dispel this concern.

Exhibit 101 at 1. It also stated, “As of October 2004, SGC customers held approximately
$1.5 billion of CDs. Approximately $227 million of these CDs were held by U.S.
investors.” Id.

     Prescott testified that when she began drafting the referral memorandum, she had intended to send it to
Barasch. Prescott Testimony Tr. at 48-49. However, the announcement of his departure changed that
intention. Id. at 47-50, 54-55. Barasch told the OIG that he did not recall receiving the 2005 Enforcement
Referral, and that he was certain that he never read it. Barasch Interview Tr. at 47-48. Barasch explained,
because he had already announced that he was leaving the SEC for private practice by the date of the 2005
Enforcement Referral, March 14, 2005, he had recused himself from all new matters by that time, and he
had been out of the office on leave a lot around that time. Id. at 47-49.


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        The 2005 Enforcement Referral also stated:

                 SGC claims that it keeps no records regarding the
                 portfolios into which SIB places investor funds and that it
                 cannot get this information from SIB. Indeed, SGC has
                 related to the Staff that SIB claims it cannot divulge the
                 specifics of how it has used customers’ deposits, based
                 (variously) upon the bank secrecy laws of Antigua and
                 SIB’s own internal “Chinese Wall” policies with SGC.

Id. at 2 (footnotes omitted).

        The 2005 Enforcement Referral characterized the SIB CD returns as “too good to
be true,” explaining:

                 SIB’s high interest rates are inconsistent with its claimed
                 portfolio. … Moreover, the Staff is equally suspicious of
                 SIB’s recurring annual 3% trailer. We are unaware of any
                 legitimate, short-term, low or no-risk investments that will
                 pay a 3% concession every year an investor keeps his funds
                 invested in any product.
                 …

                 [F]rom 2000 through 2002, SIB reported earnings on
                 investments of between approximately 12.4% and 13.3%.
                 This return seems remarkable when you consider that
                 during this same time frame … [t]he indices we reviewed
                 were down by an average of 11.05% in 2000, 15.22% in
                 2001 and 25.87% in 2002. It is equally unlikely that the
                 portion of the portfolio invested into debt instruments
                 (approximately 60%) could make up the expected losses in
                 the equity portion of the portfolio. For example, in 2002,
                 when the global indices were down 25%, the debt portion
                 of the portfolio would have to generate an approximately
                 40% return for SIB to generate the 12.4% overall return it
                 claimed in 2002.

Id. at 5 (emphasis in original) (footnotes omitted).




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        A.       The Enforcement Staff Initially Reacted Enthusiastically to the
                 Referral and Opened a MUI

       The immediate reaction from the Enforcement staff to the Stanford referral was
very positive. On April 8, 2005, ENF Asst e-mailed Preuitt and Prescott:
                                 Dir 1



                 [T]his memo is terrific. Very nicely done.

                 Moreover, I agree with the preliminary legal conclusions in
                 the memo, including the deduction that this almost
                 certainly has to be fraudulent.

                 I would like to get together with both of you and talk in
                 greater depth about possible courses of action. From a
                 tactical standpoint, the international dimension concerns
                 me because it limits our investigative powers. The [broker-
                 dealer] is domestic, of course, but I’m concerned that
                 taking action only against the domestic [broker-dealer] will
                 have a limited long-term effect on the whole apparently-
                 criminal organization, most of which is overseas.
                 Moreover, the immediate impact on U.S. investors of an
                 action against the domestic [broker-dealer] might not be
                 favorable.

Exhibit 114.
                                                ENF Asst Dir
      Preuitt immediately responded to 1                       observations about the “international
dimension” as follows:

                 The problem is very interesting. We agree with many of
                 your concerns. Its a difficult choice. It seems too difficult
                 to go after the foreign entity so nothing happens or it seems
                 too limiting to go after the US [broker-dealer] when we
                 know the whole thing must be a fraud. As a result, we’ve
                 just sat around for ten years fussing about what is going on
                 at this firm/bank.

Id. (emphasis added).
                    ENF Asst
       Although Dir 1 was very interested in the case, he did not have a staff attorney
available, so on April 12, 2005,ENF Asst forwarded the referral to Jeffrey Cohen and ENF Asst Dir 2
                                Dir 1




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  ENF Asst Dir 2
            the other two Assistant Directors in FWDO Enforcement, with the following
   explanation:

                            I’ve reviewed this and spoken to Victoria and Julie, and I
                            believe this case is worth pursuing. Victoria’s memo …
                            does a good job of laying out the apparent violations. If,
                            after reviewing it, you find yourself wondering why I
                            thought the case was worth pursuing, let me know. I don’t
                            think that will be your reaction, but I’m happy to share my
                            impression of this if it would be helpful. … One of the
                            obvious logistical and jurisdictional problems with this case
                            is the location of the issuer in Antigua. 62
                                                 ENF Asst Dir 1
   April 12, 2005 E-mail from                    to Jeffrey Cohen, attached as Exhibit 115. One
                              ENF Asst Dir
   day later, Cohen forwarded 1           e-mail to ENF BC 3         a branch chief in Cohen’s
                                ENF Staff Atty 5
   group, and asked, “[W]hat’s                            ] handling? Does she have time for this
   one?” Id.
                                            ENF BC 3
                   On April 14, 2005,                    e-mailed Prescott:

                            Your memo was fantastic. Will be very helpful going
                            forward. ENF Staff Atty 5  and I are opening MUI with
                            hope of bringing case quickly (possibly [Temporary
                            Restraining Order]). May need some help from you and
                            [other members of the Examination staff] to make it
                            happen.[64]

    April 14, 2005 E-mail from ENF BC 3       to Victoria Prescott, attached as Exhibit 116.
    On April 15, 2005, Cohen responded to ENF Asst Dir April 12, 2005 e-mail, “We’ve opened a
                                            1

    MUI inENF Staff Atty 5    ] name.” April 15, 2005 E-mail from Jeffrey Cohen to ENF Asst
                                                                                        Dir 1
 ENF Asst
 Dir 1    attached as Exhibit 117 at 2. Later the same day, Cohen e-mailed ENF Asst that the
                                                                               Dir 1

    Stanford matter “look[ed] promising.” Id. at 1.

   62 ENF Asst
     Dir 1   testified that it was “almost impossible … if you’re telling people you’ve got a CD and it’s safe
   like a bank CD … I don’t know how anybody can generate returns in double digits while still offering that
   kind of security. I mean, all of this is implausible.” ENF Dir Testimony Tr. at 29.
                                                          Asst
                                                                   1
   63
           At that time, ENF Staff Atty 5        was a FWDO Enforcement staff attorney.
   64   ENF BC
        3           explained his initial reaction to the memorandum as follows:
                   [T]here was the thought that this could have been a Ponzi scheme and that if, essentially,
                   we could get kind of bank records that would reflect, you know, the money basically
                   going in and then not being used for legitimate investment purposes but being used to
                   kind of pay back prior investors, that, you know, we’d be able to bring a case quickly.
ENF BC 3                              ENF BC 3
        Testimony Tr. at 20        testified that he had hoped to bring a case quickly because it seemed as
   though the matter was an ongoing fraud and he wanted to stop it as quickly as possible. Id. at 20-21.


                                                                   84
   This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before
   disclosure to third parties. No redaction has been performed by the Office of Inspector General.
   Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


          Early in the investigation, the Enforcement staff contacted OIA to assist them in
  getting records from SIB in Antigua. ENF BC 3 Testimony Tr. at 24. In May 2005, the
  Enforcement staff sent questionnaires to U.S. and foreign investors in an attempt to
  identify clear misrepresentations by Stanford to investors. June 3, 2005 E-mail from
 ENF BC 3
                to Jeffrey Cohen, attached as Exhibit 118; see also ENF BC 3 Testimony Tr. at


           Charles Rawl, a financial advisor at SGC from 2005 through 2007 who raised
   concerns about Stanford with the SEC in 2008, told the OIG in an interview that the
   investor questionnaires led to “significant concerns” by investors in the CDs. Rawl and
   Tidwell Interview Tr. at 6-10. Mark Tidwell, another financial advisor at SGC from
   2004 through 2007, who later raised concerns about Stanford with the SEC, told the OIG
   that his phone “lit up like a Christmas tree” with client concerns after the questionnaires
   were sent out. Id. at 8.
 DPP, WP, PII



 ENF BC 3                                      ENF BC 3        ENF Staff
               Testimony at 36. Of course, as           and Atty 5 acknowledged, until a Ponzi
   scheme begins to collapse, its victims are unsuspecting and not in a position to provide
   the SEC staff with evidence of the ongoing Ponzi scheme.ENF BC 3 testified, “[U]nlike a lot
   of Ponzi schemes that have collapsed when you’ve got investors calling you and … they
   can’t get their money out or there’s clear misrepresentations … here … we just didn’t
   have that.” Id. at 34.ENF BC 3 further explained that while a Ponzi scheme is ongoing, it is
   difficult to get investors to complain about it because they are still getting paid. Id. at 35.
ENF Staff Atty 5
                 testified that it was generally hard to bring a Ponzi scheme case before the Ponzi
                  started to unravel because:

                         [Y]ou don’t have any witnesses, you don’t have anybody
                         complaining about anything going wrong, everybody is
                         happy, so they are not particularly cooperative. In fact,
                         they are usually against us when we go in and talk to them,
                         as was the case with a lot of the investors in Stanford.
                         They were against us even meddling.
 ENF Staff Atty
 5                Testimony Tr. at 18-19.

           As demonstrated below, after the Stanford investors failed to deliver any evidence
   that the Enforcement staff believed would have allowed them to bring a case against
   Stanford, the staff attempted to close the matter and refer it to the NASD.




                                                          85
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  disclosure to third parties. No redaction has been performed by the Office of Inspector General.
  Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


            B.         By June 2005, the Enforcement Staff Had Decided to Refer the Matter
                       to the NASD, Apparently as a Precursor to Closing the Matter.
        BD Exam BC 2
                  testified that at a meeting with Cohen and others shortly after the referral,
   Cohen was “not real excited” about the Stanford matter, and that Cohen expressed DPP, WP
                                                                          65 BD Exam
DPP, WP
                                                                             BC 2      Testimony Tr. at 24-
  25. By June 2005, two months after opening the MUI, Enforcement’s interest in the
  matter had waned. 66 On June 14, 2005,Sen Cnsl                       , an attorney PII               who was
                                                                                  ENF Staff Atty
  assisting the Enforcement staff with the Stanford matter, asked 5                              for a “pithy email
  … explaining to [the Antiguan regulator] why our case is compelling.” See June 14,
  2005 E-mail from Sen Cnsl                to ENF Staff Atty 5     , attached as Exhibit 124, at 2.
  ENF Staff                                   ENF BC 3
  Atty 5    forwarded Sen Cnsl    e-mail to              with the sarcastic comment, “Uhhh--
   yeah….we’ll send a persuasive e-mail setting out why our case is so compelling…” Id.
   at 1 (ellipses in original). ENF BC 3 responded jokingly, “Apparently he hasn’t seen your
   closing memo.” Id.

          At June 21, 2005 quarterly regulators meeting, Cohen expressed pessimism about
  the viability of the SEC’s investigation. See Minutes of June 21, 2005 Regulatory
  Coordination Meeting, attached as Exhibit 125. Attendees at the meeting included
  Degenhardt, Cohen, Prescott, Preuitt and a representative from NASD. Id. at 5. The
  minutes of that meeting memorialized Cohen’s remarks as follows:

                       Stanford – Jeff [Cohen] not optimistic about viable
                       enforcement referral disclosure very cleverly crafted -
                       impeccable for most part investors well off, enjoying
                       returns -no concrete evidence of Ponzi
  65
       There is some indication that Cohen might have spoken to Barasch about Stanford a few days after
  Barasch left the SEC and approximately one week after Cohen opened the MUI. As discussed above in
  footnote 63, Barasch’s last day at the Commission was April 14, 2005. On Friday, April 22, 2005, a social
  function was held in Barasch’s honor. See April 24, 2005 E-mail from Jeffrey Cohen to Harold
  Degenhardt, et al., attached as Exhibit 119. At 6:35 p.m. on Sunday, April 24, 2005, Cohen e-mailed
  several SEC employees the remarks he had written for Barasch’s party. Id. Four hours later, at 10:34 p.m.
  on Sunday April 24, 2005, Cohen e-mailed ENF BC “Must discuss this case with both of you ASAP—
                                              3
  critical.” April 24, 2005 E-mail from Jeffrey Cohen to ENF BC 3    , attached as Exhibit 120.
  66
         On April 19, 2005, the SEC received from the Department of Labor’s Occupational Safety & Health
   Administration (OSHA) a copy of a Sarbanes-Oxley whistleblower complaint from an individual alleging
   that he was terminated in reprisal for reporting illegal financial activities. See SEC Complaint/Tip/Referral
   database printout, Control Number 13639, attached as Exhibit 121. On June 21, 2005ENF Asst e-mailed
                                                                                               Dir 1
   Degenhardt about the FWDO’s receipt of this whistleblower complaint, stating, “In rare cases, the referrals
   contain information that does justify follow-up, and this one appears to be an example of that. Stanford
   Group is a very problematic broker-dealer that has been the subject of enforcement investigations.” June
   21, 2005 E-mail fromENF Asst Dir 1 to Harold Degenhardt, attached as Exhibit 122.ENF Asst then sent an e-mail
                                                                                         Dir 1
   to ENF BC about the whistleblower complaint, stating, “This whistle blower [sic] may provide some valuable
      3
   inside info on the firm that otherwise would be hard to get.” June 21, 2005 E-mail from ENF Asst Dir 1 to
ENF BC 3        , attached as Exhibit 123. ENF BC testified that he did not recall talking to this complainant.
                                           3
  ENF BC
  3       Testimony Tr. at 45-46.


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                   Trying to reach out to some foreign investors for more
                   information.

                   Calls it a CD when it’s more like a hedge fund. Telling
                   foreign investors there is no risk but American investors are
                   being told there is complete risk. Moneys are being held in
                   Stanford’s Antigua Bank. The fee is not disclosed to
                   foreigners and to US they are not told fees are reoccurring.
                   …

Id. at 1-2.
                                           Sen Cnsl
       A July 8, 2005 e-mail from         to ENF BC 3 discussed “[o]ptions to obtain
[Stanford] bank documents.” July 8, 2005 E-mail from Sen Cnsl              to ENF BC 3                    ,
attached as Exhibit 126. Sen Cnsl summarized these options as follows:

                   1. MLAT[67] (Requires criminal interest, even soft interest,
                   to make this request);[68]

                   2. Ask [the IRS attaché to Antigua] to lean on Leroy
                   King;[69] and

                   3. Ask for the documents voluntarily from Stanford.

Id. at 2.




67
     The SEC’s intranet describes Mutual Legal Assistance in Criminal Matters Treaties (“MLATs”) as
follows:
           … MLATs are designed for the exchange of information in criminal matters and are
           administered by the US Department of Justice … Despite the fact that MLATs are
           primarily arrangements to facilitate cross-border criminal investigations and
           prosecutions, the SEC may be able to use this mechanism in certain cases. … US
           criminal interest in the matter may be required…. Notwithstanding the slowness of the
           process …, MLATs may be an effective mechanism to obtain assistance …”
See “Obtaining Documents And Testimony From Abroad,” attached as Exhibit 127, at 3.
68 ENF Staff
   Atty 5   testified that the staff drafted a MLAT request but it required “criminal interest, and … [t]he
criminal authorities [the U.S. Department of Justice] wouldn’t step up.”ENF5Staff Testimony Tr. at 44-45.
                                                                          Atty
Consequently ENF5Staff testified that a MLAT request was not sent while she worked on the Stanford matter
              Atty
[in 2005 and 2006]. Id.
69
    Leroy King was the Administrator and Chief Executive Officer of the Antigua Financial Services
Regulatory Commission. As discussed below, King has been indicted for criminal obstruction of the SEC’s
Stanford investigation.


                                                      87
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           Sen Cnsl                         ENF BC 3
                          e-mail prompted              to e-mail Prescott:

                          I feel strongly that we need to make voluntary request for
                          docs from bank. If we don’t and close case, and later
                          Stanford implodes, we will look like fools if we didn’t even
                          request the relevant documents. As for MLAT, we
                          probably should discuss further. Talked to FBI agent in
                          Houston who was aware of Standford [sic].[70] DPP, WP
                      DPP, WP
                                               As for having [the IRS attaché to
                          Antigua] lean on Leroy King, can’t hurt.

Id. at 1.

        In June 2005, 71 Degenhardt directed Prescott to refer the matter to the NASD.
See Prescott Interview Tr. at 31-32. The decision to refer the matter to the NASD
apparently was made within days of a meeting attended by, Degenhardt, Cohen and a
NASD representative, during which Cohen expressed that he was “not optimistic about
[a] viable enforcement referral.” 72

       According to Prescott, Degenhardt did not give her “much in the way of
explanation” for why he wanted the matter referred to the NASD. Id.; see also Prescott

70 ENF BC 3                                                                                          ENF BC
         testified that he could not recall any discussions with the FBI regarding Stanford in 2005. 3
Testimony Tr. at 52.
71
     A June 29, 2005 draft of the NASD referral letter is attached as Exhibit 128. The final referral letter
that was sent to the NASD on July 21, 2005, is attached as Exhibit 129. The letter included essentially the
same information contained in the 2005 Enforcement Referral. The letter noted, “SGC’s admitted inability
to get information from SIB about the investments underlying the CDs suggests that SGC may be violating
NASD Rule 2310 (Suitability).” Exhibit 129 at 2.
     According to a September 2009 FINRA report released on October 2, 2009, the NASD conducted a
routine examination of Stanford sometime in 2005. See Report of the 2009 Special Review Committee on
FINRA’s Examination Program in Light of the Stanford and Madoff Schemes (“FINRA Report”), attached
as Exhibit 130, at 18. The lead examiner on FINRA’s 2005 Stanford examination gave “special attention to
the CD issue [because of] … substantial concerns in the Dallas office regarding the Stanford firm and the
CD program in particular. Id. at 20. The lead examiner and his manager “decided that it made sense to
take a broad look and ‘see what we reel in.’” Id.
     ENF Staff Atty
     1          the former SEC Enforcement staff attorney who had worked on the SEC’s 1998 MUI
concerning Stanford, worked at FINRA PII         and “joined the discussion on the CD issue” while the
FINRA examiners prepared for their Stanford exam. Id.; ENF Staff Atty Tr. at 33. “From the moment she
                                                          1
became involved in discussions regarding the CD aspect of the 2005 Stanford cycle exam, ENF Staff Atty 1
reportedly expressed the view that the Stanford CDs were not ‘securities’ regulated under the federal
securities laws, and were therefore outside of FINRA’s jurisdiction.” Exhibit 120 at 20 (emphasis in
original).
72
    See Exhibit 125. The meeting where Cohen made his pessimistic comments about the Stanford
investigation occurred on June 21, 2005. Id. By June 29, 2005, Prescott had drafted the referral letter. See
Exhibit 128.


                                                           88
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Testimony Tr. at 68 (“[T]he case was being referred to the NASD because we were
instructed to do so, and my recollection is that came from Hal Degenhardt….”).

       Prescott testified that she had been “unhappy” about the decision to refer the
Stanford matter to the NASD. Prescott Testimony Tr. at 68. Prescott “felt like that it was
unlikely that the NASD would be able to be able to create the same kind of result that we
could here at the Commission.” Id. She “wanted to see [the SEC] work the case.” Id. at
68-69.

        Prescott’s “impression and understanding was that we were referring it to the
NASD because we would not be working it.” Id. at 69. Prescott explained that
Degenhardt’s “intent was probably to [shut down the investigation]. But in the meantime
we kept arguing and lobbying for it here, Julie [Preuitt] taking the lead, and I was
assisting her with that. Julie [Preuitt] is pretty relentless when she decides something
needs to happen. And so she was continuing to lobby and talk to people.” Prescott
Interview Tr. at 33.

        Preuitt also told the OIG that the NASD referral had been made because
Enforcement was “trying to get rid of it.” Preuitt Interview Tr. at 9. As discussed in
Section XII, the OIG investigation found that Enforcement was reluctant to take these
types of cases for a variety of reasons, including: the difficulties in obtaining approval
from the SEC staff in Washington, DC to pursue novel investigations; the pressure in the
FWDO to bring a lot of cases; the preference for “quick hit” cases as a result of that
pressure; and the fact that Stanford was not a “quick hit” case. Preuitt testified that
referring the matter to the NASD was “ludicrous,” and “after the referral was made I just
pretended like it had never happened.” January 26, 2010 Preuitt Testimony Tr. at 44.
                                                                                              Sen Cnsl
        By mid-August 2005, the Enforcement staff had apparently conveyed to
their intention to close the matter because Stanford was refusing to voluntarily produce
documents. In an August 17, 2005 e-mail from Sen Cnsl to ENF5Staff discussing OIA’s
                                                           Atty

comments regarding a draft request for documents,Sen Cnsl

                 As this letter may mark the end of your investigation, I
                 think it makes sense that we think long and hard about the
                 type of letter we wish to send.
                                  Sen Cnsl
August 17, 2005 E-mail from                           to ENF Staff Atty 5   , attached as Exhibit 131.

        In late August 2005, the Enforcement staff sent SIB a voluntary request for
documents. See September 1, 2005 E-mail from ENF BC 3             to Jeffrey Cohen, attached
as Exhibit 132. However, requesting voluntary document production from Stanford was
a completely futile exercise. Sen Cnsl noted in his August 17, 2005 e-mail, the
ineffectiveness of sending Stanford “a letter that relies on the good will of the recipient.”
Exhibit 131.


                                                   89
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Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


        Moreover, the Enforcement staff sent SIB this “standard” request six days after
SIB’s attorney “made it clear that SIB would not be producing documents on a voluntary
basis.” See August 23, 2005 E-mail from ENF Staff Atty 5  to Sen Cnsl       , attached as
Exhibit 133. The Enforcement staff sent the request even though it recognized that its
efforts to obtain the requested documents voluntarily were “moot[].” Id.

       The reason behind the staff’s document request to Stanford was apparent in a July
10, 2005 e-mail from ENF BC 3      to Victoria Prescott as follows:

                 I feel strongly that we need to make voluntary request for
                 docs from bank. If we don’t and close case, and later
                 Stanford implodes, we will look like fools if we didn’t even
                 request the relevant documents.

Exhibit 126.

        It is not clear why the Enforcement staff would have expected Stanford to
produce documents evidencing that it was operating a Ponzi scheme. In this instance, the
staff knew that the request was futile, but decided to send it anyway so as not to later
appear foolish. As discussed below, their decision to close the matter was overruled by
new senior management in the FWDO.

        C.       In September 2005, the Enforcement Staff Decided to Close the
                 Stanford Investigation, But the Examination Staff Fought to Keep the
                 Matter Open

        In the fall of 2005, the FWDO Enforcement staff considered closing its Stanford
investigation after it had reached an impasse due to Stanford’s lack of cooperation and
the staff’s lack of access to SIB’s records in Antigua. ENF BC 3 described this impasse in a
September 1, 2005 e-mail to Cohen and ENF5Staff :
                                          Atty



                 Antigua will not compel bank to produce docs. After much
                 time talking with OIA, we finally received green light to
                 issue volun[t]ary doc request to bank, care of the bank’s
                 attorney. Letter issued last week.ENF Staff Atty 5 spoke with
                 attorney for bank, who stated bank would not be producing
                 docs. …
               DPP, WP, LE




                                                   90
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  disclosure to third parties. No redaction has been performed by the Office of Inspector General.
  Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


                                           ENF BC 3
  September 1, 2005 E-mail from to                                to Jeffrey Cohen, attached as Exhibit
  132. Cohen responded, “Close the case.” Id.

         However, the examination staff, Preuitt in particular, fought to keep the
  Enforcement investigation open. On September 21, 2005, at 9:46 a.m.,ENF5Staff e-mailed
                                                                          Atty
  Cohen the following:

                   On Stanford, this morning I heard that people from [the
                   Examination staff] met with [James] Clarkson [the newly
                   appointed Acting Director of the FWDO 74 ] yesterday about
                   it. A little annoying, eh? Do you know anything about
                   that? I’ll tell you what I know when I see you.[75]
                                          ENF Staff Atty 5
    September 21, 2005 E-mail from                           to Jeffrey Cohen, attached as Exhibit
                                             ENF Staff
    136. At virtually the same time that Atty 5        sent her e-mail to Cohen, Preuitt e-mailed the
    examination staff’s “report on Stanford” to Clarkson ENF BC 3 andENF5Staff et al. See
                                                                           Atty
    September 21, 2005 E-mail from Julie Preuitt to James Clarkson, attached as Exhibit 137.
    Approximately one hour later, at 10:41 a.m., Cohen e-mailed ENF BC 3 regarding Preuitt’s e-
    mail to Clarkson, “Please call me about this.” Id. At 11:35 a.m., Cohen responded to
ENF Staff Atty 5
                 e-mail telling him “that people from [the Examination staff] met with Clarkson
    yesterday about [Stanford]” as follows:

                   Who from [the Examination staff]? How did you hear it?
                   Where’s ENF BC 3  ?
                                                                                   ENF Staff
  Exhibit 136. Four minutes later, after receiving no response fromAtty 5                      to his questions,
  Cohen e-mailed ENF5Staff :
                 Atty



                   Please respond (I’m not reaching ENF BC 3   ). Who from
                   [the Examination staff]…and are you talking about our
                   office or DC?

  Id. (ellipse in original).

  73                                                                                      ENF BC 3
      Cohen testified that he decided to close the Stanford matter “out of deference to
  recommendation.” Cohen Testimony Tr. at 52-53.ENF BC 3 disputed this assertion, stating his belief that
  Cohen decided to close the case because he felt that it was appropriate to do so, not because Cohen was
  deferring toENF BC 3 recommendation. ENF BC Testimony Tr. at 79-80.
                                         3
  74
       Degenhardt’s departure from the SEC was announced on August 15, 2005. See SEC Press Release
  2005-116 (Aug. 15, 2005), attached as Exhibit 134. On August 31, 2005, James Clarkson was named as
  the Acting Director of the FWDO. See SEC Press Release 2005-123 (Aug. 31, 2005), attached as Exhibit
  135.
  75
      The e-mail exchange indicates that Cohen was out of the office which is supported by the fact that he
  responded from his blackberry. See Exhibit 136.


                                                             91
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Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


ENF Staff
Atty 5      replied:
                   …Julie [Preuitt] said they talked to Clarkson and expressed
                   their frustration with the fact that enforcement didn’t want
                   to bring a case ….
Id.

      However, Preuitt’s efforts did not change Cohen’s decision to close the case. On
October 24, 2005,ENF5Staff e-mailed Prescott and Preuitt:
                 Atty


                   FYI, we have decided to recommend closing the Stanford
                   investigation. We’re preparing the closing memo. I’ll keep
                   you posted.
                                     ENF Staff Atty 5
October 24, 2005 E-mail from                      to Victoria Prescott, attached as Exhibit
         76
138 at 2. Twenty minutes after receiving this message, Preuitt forwarded it to
Katherine Addleman, FWDO Associate District Director for Enforcement, 77 copying
Cohen andENF Staff Atty and asked, “Can we discuss before closing?” Id. Preuitt testified that
            5
she also “went to Kit [Addleman] telling her how much we needed not to close this and
that angered [Cohen].” January 26, 2010 Preuitt Testimony Tr. at 56.
                                                                                              ENF Staff
            Cohen responded to Preuitt’s e-mail, copying Addleman and Atty 5
                                                        ENF Staff Atty 5
                   Since our last meeting in                              office last
                         ENF Staff Atty 5
                   week                   and I met to discuss with the legal intern …
                   the fruits of her research. DPP, WP, LE
                  DPP, WP, LE



Exhibit 138.
                                                                                                          ENF Staff
        According to an October 26, 2005 e-mail exchange between ENF BC and Atty 5
                                                                      3                   the
Examination staff advocated for continuing the investigation and the         rcement staff
continued advocating that the matter be closed. ENF5Staff described the status of the matter
                                                Atty
as follows:
                   Well, Stanford is kind of a goat screw. Long story short,
                   Jeff [Cohen] told me to kill it, Julie [Preuitt] was upset,
                   started an e-mail battle, long talks with Julie, fight b/w Julie
                   and Jeff (Julie won), now I’m researching and doing all
                   kinds of stuff on it, but still am finding DPP, WP

76                                                                         ENF Staff
     Prescott testified that she was “unhappy” when she received Atty 5                e-mail that said Enforcement was
closing the Stanford investigation. Prescott Testimony Tr. at 74.
77
    Addleman replaced Barasch as the FWDO Associate District Director for Enforcement on August 23,
2005. See SEC Press Release 2005-120 (Aug. 23, 2005), attached as Exhibit 123. Addleman was FWDO
Associate District Director for Enforcement until 2007. Addleman Testimony Tr. at 9.


                                                              92
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                     DPP, WP
                            , but having to run down every possible scenario. It’s
                        not so much fun. That’s about all.[78]
                                           ENF Staff Atty 5        ENF BC 3
     October 26, 2005 E-mail from                           to               attached as Exhibit 141.
ENF BC 3
            responded, “On Stanford, agree with Jeff [Cohen]. If no offering fraud, not worth
     pursuing.” Id.ENF Staff Atty replied, “I totally do agree with Jeff. Julie is just really passionate
                     5
     about this and is fighting hard, going to Kit [Addleman], etc. and so we have to do all this
     stuff. It’s frustrating!” Id.

               On October 27, 2005, Clarkson e-mailed Preuitt:

                        I advised Jeff [Cohen] that I understood that the exam staff
                        and the folks in enforcement were wrestling with how to
                        deal with the Sandford [sic] matter. I requested that he
                        prepare for me a brief memo setting out the reasons why
                        enforcement feels that the case can’t be made.
                        I would like you to do the same from an exam staff
                        perspective. … When I return to the FWDO on November


   78
           It appears that until November 2005, the Enforcement staff spent more time and energy trying to close
    the Stanford matter than they spent investigating it. On October 27, 2005, Wright e-mailed Clarkson
    regarding his concerns about Cohen’s interactions with the examination staff in connection with Stanford.
    See October 27, 2005 E-mail from Hugh Wright to James Clarkson, attached as Exhibit 140. Specifically,
    Wright tried to “clarify the situation as it relates to Julie [Preuitt], Victoria [Prescott], and maybe ENF5Staff
                                                                                                            Atty
 ENF Staff Atty 5 .” Id. at 1. Wright explained:


               Basically, Julie is scared of Jeff’s reactions to anything that crosses him. … According to
               Julie, Victoria is also very concerned PP
           PP


           PP
                                                    … Whether resolving the issues about the Stanford
               case will alleviate the situation is questionable. … If the decision is made to close
               Stanford, that is certainly up to Kit and the enforcement staff. … The point that I am
               trying to make clear is that at least one member of the staff, and maybe more, are
               personally concerned PP
           PP




   Id. at 2.
        The staff tension may have been exacerbated by the fact that Cohen had been Degenhardt’s choice to
   replace Barasch, but on August 23, 2005, Addleman was named as Barasch’s successor instead. See
   Exhibit 139; Addleman Testimony Tr. at 55-56. Addleman had worked in the FWDO office as a branch
   chief at one point. See Exhibit 139. She was serving as an Assistant Regional Director for Enforcement in
   the SEC’s Denver Regional Office when she was promoted to Associate District Director for Enforcement
   in FWDO. Id. Addleman testified that Cohen had been “unhappy with my appointment to that position
   over him.” Addleman Testimony Tr. at 19-20.


                                                              93
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                 7th, Kit [Addleman] and I will plan to sit down with you
                 and Jeff and resolve this matter one way or the other.

October 27, 2005 E-mail from James Clarkson to Julie Preuitt, attached as Exhibit 142 at
1-2.

       In response to Clarkson’s request, Preuitt prepared a November 7, 2005
memorandum for Clarkson and Addleman that summarized the Examination staff’s
concerns about Stanford. See November 7, 2005 Memorandum from Hugh Wright to
James Clarkson (the “Preuitt Memorandum”), attached as Exhibit 143. In addition to
discussing the significant circumstantial evidence that the SIB CDs were a Ponzi scheme,
the Preuitt Memorandum noted:

                 Stanford is expanding rapidly. From what records we can
                 obtain it has increased its assets by approximately 50%
                 over the last 18 to 24 months. Per our discussions with
                 current and former Stanford Group personnel, Stanford
                 Bank has been in a consistent state of growth over the past
                 ten years and the pressure to increase the amount of sales
                 has increased over the last two or three years. Accordingly,
                 Stanford Bank has not had to undergo any period when
                 withdrawals have exceeded deposits. Such pressure to
                 increase sales is frequently associated with fraudulent
                 schemes.

Id. at 2. The Preuitt Memorandum closed with a recommendation that the Enforcement
staff obtain a formal order of investigation as follows:

                 In light of the earmarks of fraud noted above, it is troubling
                 to imagine the Commission failing to resolve its concerns
                 regarding the legitimacy of the product offered because the
                 relevant parties either refuse to or cannot provide the
                 requested, necessary information to confirm or dispel those
                 concerns. Just as troubling, is to imagine the Commission
                 to continue allowing a U.S. registered broker-dealer to offer
                 a product about which it does not have the necessary
                 information to make a reasonable basis for a
                 recommendation.

Id. at 2.

        The Preuitt Memorandum convinced senior management to overrule Cohen and
continue the investigation. This decision ultimately ended the feuding between the
examiners and the Enforcement staff that had consumed most of the time spent on the
matter to that point.

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          D.        In November 2005, the Head of the FWDO Enforcement Group
                    Overruled Her Staff’s Objections to Continuing the Stanford
                    Investigation and Decided to Seek a Formal Order in Furtherance of
                    That Investigation

          In response to Clarkson’s request for a memorandum setting forth Enforcement’s
  perspective regarding the Stanford investigation, Cohen prepared an eleven-page
  memorandum (the “Cohen Memorandum”) that discussed the status of the investigation,
  the difficulties confronting the staff, and Cohen’s view of the options going forward. See
  November 14, 2005 Memorandum from Jeffrey Cohen to James Clarkson, attached as
  Exhibit 144. Cohen addressed the Examination staff’s recommendation for a formal
  order as follows:
                DPP, WP




  Id. at 1-2.

           Cohen recommended that, if the Stanford investigation continued, it should focus
  on DPP, WP                    causes of action. Id. at 11. After discussing the
DPP, WP


DPP, WP
                                         Cohen made the following recommendation:
                 DPP, WP




                                                     95
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                 DPP, WP




 Id. 80

          Addleman testified that she recalled that at this time there was a “disagreement”
 between the Examination staff and the Enforcement staff about the Stanford
 investigation. Addleman Testimony Tr. at 12. She recalled that the Enforcement staff
 “was having a difficult time getting their arms around whether it was a fraud.” Id. She
 testified that the issue was framed as, “[D]oes it make sense to do a case that[] …
 appeared at that time to be all that the SEC could prove would be a registration violation,
 does it make sense for us to use scarce resources for that case versus something else[?]”
 Id. at 14.

         Addleman met with the staff to discuss the disagreement. January 26, 2010
 Preuitt Testimony Tr. at 62. Before she met with the staff, Addleman was aware that
 there had been other examinations of Stanford prior to the 2004 Examination. Addleman
 Testimony Tr. at 14. However, she was not aware that the examination staff had
 concluded as far back as 1997 that Stanford was a potential Ponzi scheme. Id.

          Addleman recalled that during the meeting, the staff discussed the possibility of
 filing an action against Stanford alleging violations of the federal securities laws
 unrelated to a Ponzi scheme as a way to overcome Stanford’s refusal to provide
 documents necessary to prove the SIB CDs were a Ponzi scheme. Id. at 14-15.
 Specifically, Addleman recalled a discussion about “whether it made sense to bring a
 Section 5 [unregistered securities] case and try and address in a court setting as opposed
 to a Commission investigation getting behind those documents.” Id. at 15-16. Addleman
 testified that Cohen had “the strongest view” on the issue. Id. at 16. Despite Cohen
 presenting a DPP, WP    charge as an option in the Cohen Memorandum, Addleman
 characterized Cohen’s view on bringing a DPP, WP
DPP, WP




 79
      Addleman explained that the reason for the DPP, WP      in the Cohen Memorandum which
DPP, WP                                                            … DPP, WP
DPP, WP
               was that Addleman had been “pretty direct … that we were going to continue to do what we
could to obtain information” about Stanford. Addleman Testimony Tr. at 26. See also, Prescott Testimony
Tr. at 78 (“The memorandum itself seems DPP, WP                                       but the context in
which this memorandum was created came out of the decision to close it. So I viewed this as, okay, if
we’re not going to close it, here is my best judgment as to how we might be able to proceed.”)
 80
     Preuitt testified that working with Cohen was “extraordinarily difficult,” in part because “he only
 wanted to bring cases that were slam dunk, easy cases.” January 26, 2010 Preuitt Testimony Tr. at 42.
 Preuitt elaborated, “He wanted to have all of his cases so they were narrowed down to something so small
 and so bulletproof that you could be exempt from any sort of possible criticism that it would tend to gut
 your case.” Id.


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DPP, WP
                                                                      Exhibit 144; Addleman Testimony


           At the meeting, Addleman decided to “keep the case open and to seek a formal
 order.” Prescott Interview Tr. at 34. Although Cohen proposed limiting the investigation
 to DPP, WP                            Addleman decided to continue the investigation of
 whether Stanford was operating a Ponzi scheme. See Addleman Testimony Tr. at 24-26.
 Addleman made this decision because of “the possibility of a Ponzi scheme and a pretty
 significantly-sized one.” Id. at 26. She added, “although there are some hurdles, we
 needed to move the investigation forward and if possible get into court.” Id. Addleman
 testified that after the meeting, the Enforcement staff “did move [the investigation]
 forward and … did look for avenues to try and determine the best way to get evidence [of
 a Ponzi scheme].” Id. at 25-26.

         The staff obtained a formal order of investigation on October 26, 2006 – two
 years after the Examination staff began their examination of SGC in order to refer the
 matter to Enforcement. 81 As discussed above, the staff’s conduct of the Stanford
 investigation from this point forward was the subject of a previously-issued OIG Report.
 That OIG Report did not substantiate the allegation that the SEC had made no effort to
 investigate Stanford after obtaining the formal order until Madoff’s Ponzi scheme
 collapsed in mid-December 2008. The OIG also found that after April 2008, when the
 FWDO staff referred Stanford to DOJ, the FWDO effectively halted its Stanford
 investigation at the request of DOJ so it could pursue its criminal case. However, the
 OIG investigation also found that “[i]mmediately after the revelations of the Madoff
 Ponzi scheme became public in December 2008, the Stanford investigation became more

 81
        After Addleman decided to seek a formal order, it took the FWDO staff approximately seven months
   to prepare a formal order action memorandum because, according to Addle             ohen “worked very, very
   hard to get it perfect.” Addleman Testimony Tr. at 51. On April 25, 2006, ENF5Staff received comments to a
                                                                               Atty
   draft of the formal order action memorandum from Cohen and ENF BC 1         , a branch chief who had
   replaced ENF BC on the Stanford investigation. See April 25, 2006 E-mail from ENF BC 1
             3                                                                                 to ENF Staff Atty
                                                                                                  5
ENF Staff , attached as Exhibit 145. One comment to the draft action memorandum was:
Atty 5

           We need right here a thorough discussion of what FWDO [Enforcement and Examination
           staff] have been doing with this matter since the referral – we’ll stick with the 3/05 referral
           date rather than what I understand to be the exam date in 10/04. List everything, including
           document gathering, meetings, research, whatever. We’re going to get nailed for the passage
           of time unless we have a good explanation here. Be creative.
 Id. at 4, note 1.
      A draft of the formal order action memorandum was circulated by the FWDO for review and comment
 to various SEC offices and divisions in Washington, DC, on June 13, 2006. See June 13, 2006 E-mail from
 Jeffrey Cohen to “Enforcement Action Memos,” attached as Exhibit 146. FWDO responded to comments
 received from OCIE, the Office of General Counsel and the Divisions of Investment Management, Market
 Regulation, and Corporation Finance. See August 21, 2006 E-mail from ENF Staff Atty 5      to ENF Atty 2
 and ENF Asst Ch Cnsl    attached as Exhibit 147. Four months after the draft was circulated, the request for
 the formal order was presented to the Commission and approved. See October 11, 2006 Action
 Memorandum Seeking Formal Order Authority, attached as Exhibit 148.


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urgent for the FWRO,” and the SEC moved forward with its Stanford investigation.
Report of Investigation, Case No. OIG-516, entitled “Investigation of Fort Worth
Regional Office’s Conduct of the Stanford Investigation” at 10.

VIII. THE ENFORCEMENT STAFF REJECTED THE POSSIBILITY OF
      FILING AN “EMERGENCY ACTION” AGAINST SIB BASED ON
      CIRCUMSTANTIAL EVIDENCE THAT IT WAS OPERATING A PONZI
      SCHEME

       In November 2005, the Enforcement staff considered recommending that the
Commission file an “emergency action” against SIB expressly alleging that the CDs were
a Ponzi scheme based solely on the circumstantial evidence available to the staff. See
Exhibit 144. The Cohen Memorandum presented this option as follows:
               DPP, LE, WP




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                   DPP, LE, WP




  Id. at 2-3 (footnotes omitted).
                                                                                   DPP, LE, WP
              The Cohen Memorandum stated that bringing such an action
                   DPP, LE, WP




  Id. at 4. See also Cohen Testimony Tr. at 50

          The Cohen Memorandum acknowledged that there were two primary categories
  of circumstantial evidence that would have supported an allegation by the Commission
  that the SIB CDs were a Ponzi scheme – DPP, LE, WP
DPP, LE, WP



                   DPP, LE, WP




  Id. at 3-4 (footnotes omitted) (emphasis in original).

                                                     99
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                                     DPP, LE, WP
         Cohen believed that the                                  that the CDs were a Ponzi scheme
 and the DPP, LE, WP                                                      meant that an action by the
 Commission would have been a DPP, WP
                 DPP, WP




                  DPP, WP




 Id. at 4 (footnotes omitted) (emphasis in original). Cohen also noted that if the
 Commission filed an action, DPP, WP
DPP, WP
                                        Id.

         Cohen testified that he met with Addleman, Clarkson and Stephen Korotash, then
  a FWRO trial attorney, and that those three individuals decided against filing an
  emergency action DPP, WP
DPP, WP
         . Cohen Testimony Tr. 65-68. Cohen testified that he was not “entirely
  comfortable with that decision” and that he “thought it was a mistake at the time we
  met.” Id. at 68, 78. 82

         In April 2006, the Enforcement staff apparently considered presenting to the
 Commission the issue of whether it should file an emergency action. See Exhibit 145. A
 draft of the formal order action memorandum that was circulated in April 2006 discussed
 three “special issues” as follows:
                                                                    AC, DPP, WP
                  This matter raises three special issues: (1)
                 AC, DPP, WP
                                                                     (2)
                  whether further investigation is warranted to determine
                  whether the CD program is a Ponzi scheme; and (3)
 82                                                                                                  ENF BC
      However, as discussed above, approximately six weeks before the meeting, Cohen had instructed 3
 to “[c]lose the case” and Addleman overruled Cohen after an appeal by Preuitt. See Exhibit 132.


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                     AC, DPP, WP




   Id. at 7.
                                                                AC, DPP, WP
                After including verbatim an excerpt from
 AC, DPP, WP                                                              AC, DPP, WP
                                    the draft action memorandum concluded,
AC, DPP, WP

   Id. at 9. As the draft action memorandum noted, during the five months since the
   November 2005 meeting, AC, DPP, WP
 AC, DPP, WP
                     Id. at 8, note 10.

           However, the draft formal order action memorandum that the FWDO submitted to
   Washington, DC, for review and comment on June 13, 2006 (“June Draft Action
   Memorandum”), omitted the discussion of filing an “emergency action” as a “special
   issue.” See Exhibit 146. The June Draft Action Memorandum described the special
   issues as follows:
                      AC, DPP, WP




                                                                         AC, DPP, WP
   Id. at 5. The June Draft Action Memorandum did state,
 AC, DPP, WP


 AC, DPP, WP
                               Id. at 6.

           Ultimately, the SEC did rely, in part, on circumstantial evidence in filing an
   action against Stanford on February 16, 2009. 84 The following chart compares some of
   the circumstantial evidence included in the SEC’s 2009 Complaint with similar
   statements from the prior examinations and referrals.

   83
        The discussion of the “special issues” and the statement,AC, DPP, WP
  AC, DPP, WP
 AC, DPP, WP
                                                                                  in the June Draft Action
   Memorandum, were AC, DPP, WP
  AC, DPP, WP  See Exhibit 148.
   84
        The Complaint filed by the SEC in 2009 also relied on “additional evidence in 2008 that was not
   available earlier.” See Prescott Testimony Tr. at 60. See also Report of Investigation, Case No. OIG-516,
   entitled “Investigation of Fort Worth Regional Office’s Conduct of the Stanford Investigation.”


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      SEC ALLEGATIONS IN 2009                           EVIDENCE FROM PRIOR EXAMS

SIB claims that its “diversified portfolio            [F]rom 2000 through 2002, SIB reported
of investments” lost only 1.3% in 2008, a             earnings on investments of between
time during which the S&P 500 lost 39%                approximately 12.4% and 13.3%. This
and the Dow Jones STOXX Europe 500                    return seems remarkable when you
Fund lost 41%.                                        consider that during this same time frame
Exhibit 1 at ¶ 3 (emphasis added). See                SIB supposedly invested at least 40% of its
also, id. at ¶ 29                                     customers’ assets into the global equity
                                                      market. Ten of 12 global equity market
For almost fifteen years, SIB represented             indices were down substantially during the
that it has experienced consistently high             same time frame. The indices we reviewed
returns on its investment of deposits                 were down by an average of 11.05% in
(ranging from 11.5% in 2005 to 16.5% in               2000, 15.22% in 2001 and 25.87% in 2002.
1993) … Since 1994, SIB claims that it has            It is equally unlikely that the portion of the
never failed to hit targeted investment               portfolio invested into debt instruments
returns in excess of 10%. … SIB’s                     (approximately 60%) could make up the
historical returns are improbable, if not             expected losses in the equity portion of the
impossible. After reviewing SIB’s returns             portfolio. For example, in 2002, when
on investment over ten years, a                       the global indices were down 25%, the
performance reporting consultant hired by             debt portion of the portfolio would have
Stanford characterized SIB’s performance              to generate an approximately 40%
as “not possible - almost statistically               return for SIB to generate the 12.4%
impossible.” Further, in 1995 and 1996,               overall return it claimed in 2002.
SIB reported identical returns of 15.71%, a           Exhibit 101 at 5 (emphasis added).
remarkable achievement considering the
bank’s “diversified investment portfolio.”
Exhibit 149 at 7-8.

SIB’s extraordinary returns have also                 Moreover, the Staff is equally suspicious
enabled the bank to pay disproportionately            of SIB’s recurring annual 3% trailer. We
large commissions to SGC for the sale of              are unaware of any legitimate, short-
SIB CDs. SGC receives a 3% fee from                   term, low or no-risk investments that
SIB on sales of CDs by SGC advisers. …                will pay a 3% concession every year an
SGC promoted this generous commission                 investor keeps his funds invested in any
structure in its effort to recruit established        product.
financial advisers to the firm. The                   Exhibit 101 at 5 (emphasis added).
commission structure also provided a
powerful incentive for SGC financial
advisers to aggressively sell CDs to
United States investors, and aggressively
expanded its number of financial advisers
in the United States.
Exhibit 149 at 9 (emphasis added).

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        In addition to the foregoing, Enforcement’s decision not to bring a case in 2005
may have also been influenced by the following factors, discussed in Section XII: (1) the
staff bureaucracy in Washington, DC, discouraged pursuing “novel” cases; (2) the
pressure for “stats” resulted in an emphasis on pursuing “slam-dunk” cases; and (3) the
“feeling that the Commission was … more receptive to clear-cut cases.” See January 26,
2010 Preuitt Testimony Tr. at 72-74; Addleman Testimony Tr. at 27.

IX.        THE ENFORCEMENT STAFF REJECTED THE POSSIBILITY OF
           FILING AN ACTION AGAINST SGC’S BROKER-DEALER FOR
           VARIOUS VIOLATIONS OF THE FEDERAL SECURITIES LAWS

        As discussed above, the Examination staff and the Enforcement staff had a
fundamental disagreement for eight years regarding whether Stanford should be
investigated. However, they did agree that Stanford was probably operating a Ponzi
scheme. Cohen acknowledged that agreement and explained the staff’s divergent views
on the issue of whether an investigation was warranted as follows:

                  Everybody, everybody believed that this was probably a
                  Ponzi scheme. We weren’t entirely sure because there was
                  no actual evidence of an imploding scheme. But the
                  examination people were very clear. They said, “We’re
                  convinced this is a Ponzi scheme.” … [A]nd nobody in the
                  enforcement division disagreed with them. They just said
                  we’ve got to have proof.

Cohen Testimony Tr. at 24-25. 85

        On this point, Cohen and Preuitt agreed with each other. Preuitt testified that no
one in FWDO ever said, “I think you’re wrong. It doesn’t look to be a Ponzi scheme to
me. It doesn’t look to be a fraud.” January 26, 2010 Preuitt Testimony Tr. at 70.
Instead, “[t]he response was this is indicia of fraud. You can’t take that into court,
indicia of fraud, you must be able to prove it.” Id. Wright also testified that “[i]t was
obvious for years that [Stanford] was a Ponzi scheme.” Wright Testimony Tr. at 51.

        In a November 7, 2005 memorandum to Addleman and Clarkson, Wright and
Preuitt expressed their view about the situation as follows:

                  In light of the earmarks of fraud noted above, it is troubling
                  to imagine the Commission failing to resolve its concerns
                  regarding the legitimacy of the product offered because the

     ENF Staff
85   Atty 5 testified that when she became involved in the Stanford investigation, it was generally thought
that the CD returns were too good to be true and it was pretty clear that there was some fraud or Ponzi
scheme going on but it was a question of how to attack it. ENF5Staff Testimony Tr. at 32-33.
                                                           Atty




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                    relevant parties either refuse to or cannot provide the
                    requested, necessary information to confirm or dispel those
                    concerns. Just as troubling, is to imagine the Commission
                    to continue allowing a U.S. registered broker-dealer to offer
                    a product about which it does not have the necessary
                    information to make a reasonable basis for a
                    recommendation.

Exhibit 143 at 2-3.

       The Examination staff advocated that the Enforcement investigation focus on
SGC and that the SEC pursue any viable legal theories to support an action against SGC.
As Preuitt explained:

                    [M]y suggestion -- we had so many different theories.
                    Instead of going after the big thing which we may not be
                    able to get to in Antigua, why can’t you do something
                    about the broker-dealer? We have a US-registered broker-
                    dealer selling something that we don’t know what it is.
                    And, you know, why can’t we be a little bit -- you know,
                    pursue all our legal theories related to that and at least stop
                    them from selling it?

Preuitt Interview Tr. at 19.

        Similarly, IA Examiner 1 described how he had envisioned Enforcement pursuing an
action against SGC as follows:

                    My thought at the time was -- is that we’ve got SEC-
                    registered entities selling an investment. … My idea …
                    was … that the enforcement staff would … send out a
                    voluntary request for information from the registered
                    entities, we want information about what’s happening to
                    the money offshore, and probably they would not provide
                    it. At that point, you get a formal order.

                    Then you subpoena the information from those regulated
                    entities. They say, we don’t have it, we can’t get it. At that
                    point, now you can file a public subpoena enforcement
                    action in a federal court and lay out all of your suspicions
                    about those CDs for the entire world to know. It would be
                    about two weeks after that you found out whether there was
                    a Ponzi [scheme] or not.
IA Examiner
1             Testimony Tr. at 57.

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      IA Examiner 1
                 attributed the fact that the Enforcement staff never pursued that course of
action to the following:

                      [I]t seemed that there was a preoccupation with the fact
                      we’re dealing with an Antigua bank, and I was always
                      saying forget the bank. We’ve got a [broker-dealer] and an
                      [investment adviser]. Focus on them.

Id. at 58.

        Addleman agreed that filing an action against Stanford alleging violations of the
federal securities laws unrelated to a Ponzi scheme would have been one way to
overcome Stanford’s refusal to provide documents that the staff needed to prove the SIB
CDs were a Ponzi scheme. Addleman Testimony Tr. at 14-16. In fact, as discussed
above, she decided in November 2005 to continue the investigation because of “the
possibility of a Ponzi scheme and a pretty significantly-sized one.” Id. at 26.

       The potential violations that the Examination staff advocated that Enforcement
pursue included:

         ● Section 10(b) of the Exchange Act and Rule 10b-5: In 1997, and again in
           2005, the Examination staff argued that SGC was making misrepresentations
           regarding the safety of the CDs. The Examination staff noted the consistently
           high returns on the SIB CDs, and observed, “Based on the amount of interest
           rate and referral fees paid, SIB’s statements indicating these products to be
           safe appear to be misrepresentations. … SIB must be investing in products
           with higher risks than are indicated in its brochures and other written
           advertisements.” Exhibit 49 at 2-3. The 2005 Enforcement Referral noted
           that the CD sales brochures provided by SGC included representations of a
           “guaranteed” interest rate and claimed that the CD “provide[d] a secure way”
           to participate in the growth of equity markets. Exhibit 101 at 5-6. The 2005
           Enforcement referral stated that “[u]se of the terms CD, ‘interest,’ ‘secure’
           and ‘guaranteed’ are misleading and suggest a degree of safety that is not
           inherent in the product being offered.” Id. at 6.

         ● Rule 17a-4 of the Exchange Act: In 1997, the Examination staff referred SGC
           for possible violations of Rule 17a-4 of the Exchange Act for failing to
           maintain books and records. Exhibit 49 at 4. The Examination staff found
           that SGC recommended the SIB CDs to clients without maintaining any
           records pertaining to the client’s financial information or investment
           objectives, or any records such as order tickets or confirmations relating to the
           CD purchase by the client. Id.




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          ● NASD Rule 2310 (Suitability): In 2005, the Examination staff encouraged the
            Enforcement staff to consider bringing a suitability case against SGC. On
            April 18, 2005, Prescott e-mailed Cohen the following:

                        In one of our conversations--either this morning or last
                        Friday--I mentioned the possibility of taking a
                        somewhat novel approach and naming Stanford for
                        violating the NASD Rule pertaining to suitability,
                        which seems easier to prove than our standard 10b-5
                        approach. Specifically, NASD Rule 2310
                        “Recommendations to Customers (Suitability)”
                        provides that

                            “In recommending to a customer the purchase, sale
                            or exchange of any security, a member shall have
                            reasonable grounds for believing that the
                            recommendation is suitable for such customer upon
                            the basis of the facts, if any, disclosed by such
                            customer as to his other security holdings and as to
                            his financial situation and needs.”

                        It is hard to see how Stanford the broker-dealer can, on
                        the one hand, claim that it does not know any details
                        about the “CDs,” and on the other hand, make a
                        determination that these are suitable investments.

                        Exchange Act Section 21, dealing with investigations
                        and actions, is helpful with respect to charging
                        violations of NASD rules. Specifically, Section
                        21(d)(1) and Section 21(f). I think we can make a
                        strong argument that it is in the public interest and for
                        the protection of investors to charge Stanford with
                        violations of NASD Rule 2310.

              April 18, 2005 E-mail from Victoria Prescott to Jeffrey Cohen et al., attached
              as Exhibit 150. 86




86
      Cohen testified that the SEC could not bring an action to enforce NASD rules, such as the suitability
 rule. Cohen Testimony Tr. at 91. In fact, the SEC can enforce NASD’s rules, as Prescott’s e-mail
 explained, if to do so “is in the public interest and for the protection of investors.” Exhibit 150; see also
ENF BC
3      Testimony Tr. at 22.


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              ● Section 5 of the Securities Act: In 2002, and again in 2005, the Examination
                staff referred SGC for a potential unregistered offering of securities. Exhibit
                70 at 1, 15; Exhibit 101 at 3-4. In 2002, the Examination staff argued that
                SGC was generally soliciting investors for the SIB CDs in violation of its
                Regulation D exemption. Exhibit 70 at 11-12. The 2005 Enforcement
                Referral stated:

                         [I]t appears that SIB is relying upon Regulation D Rule
                         506 to exempt its CD offerings from registration. Rule
                         506 requires SIB to comply with the prohibitions
                         against a general solicitation and the limitations upon
                         unaccredited investors. The Staff has not found
                         evidence of sales by SGC to non-accredited investors
                         who are U.S. citizens. It does appear that SGC sold
                         CDs to more than 35 unaccredited foreign investors. In
                         fact, it appears that SGC made no attempt to limit sales
                         to accredited foreign investors.

                 Exhibit 101 at 3.

              ● Exchange Act Rule 10b-10: In 2005, the Examination staff referred potential
                violations of Rule 10b-10 by SGC. The 2005 Enforcement Referral stated
                that the rule required SGC to disclose the source and amount of remuneration
                it received in connection with its referred customers’ purchase of the SIB
                CDs. Exhibit 101 at 6. The 2005 Enforcement Referral observed that the SIB
                brochure given to foreign investors did not contain any information regarding
                the 3% trailer fee paid to SGC by SIB. Id.

              ● Section 7(d) of the Investment Company Act of 1940 (“Investment Company
                Act”): In 2005, the Examination staff also referred potential violations of
                Section 7(d) of the Investment Company Act by SIB. Id. at 4. The referral
                noted that, “Although banks are ordinarily excluded from the registration
                requirements of the Investment Company Act, SIB’s own disclosure
                documents suggest that it fails to meet the definition of a foreign bank …” Id.

            Furthermore, Cohen recommended in November 2005, that the Stanford
  investigation be DPP, LE, WP
DPP, LE, WP
                                However, in 2006, the Enforcement staff circulated a draft
  formal order action memorandum that DPP, LE, WP
DPP, LE, WP
                  . See Exhibit 146. As part of the formal order action memorandum review
  process in 2006, the SEC’s Division of Corporation Finance DPP, LE, WP
DPP, LE, WP

DPP, LE, WP
                                                                               See Exhibit 147 at 3.



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        However, in 2005, the Enforcement staff decided that attacking Stanford’s Ponzi
scheme indirectly by filing an action at that time against SGC for any of the above-listed
violations would not be worthwhile. ENF Staff Atty Testimony Tr. at 33-34. ENF Staff Atty explained
                                     5                                     5

the Enforcement staff’s rationale for that decision in the following exchange:

                 Q: … [W]as there any thought to trying to find any hook to
                    bring a case against Stanford even if you didn’t
                    necessarily have all of your ducks in a row so you could
                    kind of start the process of stopping the fraud?
                    A: Yeah. … We talked to market reg. We talked to
                    IM. We talked to – I mean, I feel like a lot of heads
                    looked at it, and … the aim was what can we do, what
                    can we really do to get this when we don’t have what
                    we would normally need to bring [a Ponzi scheme case]
                    -- typically when we bring a Ponzi scheme case, we
                    would have bank records or we would know that the
                    money was being misappropriated.
                      Here we had this kind of legitimate looking operation
                      with a lawyer [Thomas Sjoblom 87 ] that used to be with
                      the SEC and he’s making these representations to us,
                      and there was just so much that we didn’t have. So
                      what kind of case could we bring? I know we talked
                      about maybe a 10b-10 case or some kind of a sales
                      practice case and thought it’s going to be really lame.
                      Like we looked at the remedies on some of these things,
                      and the one in particular -- I don’t remember the
                      provision or what it was, but it was like a FINRA
                      violation, and it just seemed like so small potatoes, who
                      cares. So there was sort of a weighing of if we’re going
                      to get this, we should get it and not be wasting our time
                      with a sales practice case.

Id.

        As noted earlier, the initial Complaint filed by the SEC on February 17, 2009, did
not include allegations that Stanford was operating a Ponzi scheme. However, it did
attack the Ponzi scheme indirectly by asserting other claims including a claim that SGC
and SIB violated Section 7(d) of the Investment Company Act. Exhibit 149 at ¶¶ 128-

87
     Stanford was represented by Thomas Sjoblom, a partner at Proskauer Rose LLP, in connection with
the SEC’s investigation. Sjoblom was an “assistant chief litigation counsel in the SEC’s enforcement
division for 12 years before going into private practice.” See Amir Efrati, The Stanford Affair: Another
Bad Day for Proskauer, The Wall Street Journal Law Blog, August 27, 2009, attached as Exhibit 151.


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131. The SEC’s Complaint alleged that SIB was an unregistered investment company
that offered or sold securities it had issued, and that SGC acted as an underwriter for SIB.
Id. The public revelation that the SEC failed to uncover the Madoff Ponzi scheme
changed the Enforcement staff’s view of the risks and benefits of filing an action against
Stanford without direct evidence that he was operating a Ponzi scheme.

X.       THE ENFORCEMENT STAFF DID NOT CONSIDER FILING AN
         ACTION UNDER THE INVESTMENT ADVISERS ACT THAT COULD
         HAVE POTENTIALLY SHUT DOWN SGC’S SALES OF THE SIB CDs
      ENF BC 3
                testified that there were very significant obstacles that hampered any effort
by the SEC to gather direct evidence that SIB was operating a Ponzi scheme: “[G]etting
the bank records was … an important piece of the puzzle, and to the extent we were
unable to get those bank records either from the bank or from the regulator because it was
a foreign bank, that it was going to make a case very difficult.” ENF BC 3 Testimony Tr. at
56.ENF BC 3 testified that without being able to get the SIB bank records, it was “probably
impossible to bring a Ponzi scheme case or extremely difficult to bring that kind of case
without having some documentation about … where the money was going.” Id. at 57.
Moreover, the FWDO Enforcement staff believed that they would have faced opposition
from the staff in Washington, DC had they recommended bringing any action predicated
on the argument thatDPP, WP                       , and would certainly have had to
successfully litigate that issue had they brought such an action.

        The Examination staff advocated that the SEC attack the Ponzi scheme indirectly
by filing an action against SGC for violations of various securities laws, including selling
unregistered securities and making inadequate disclosures to foreign investors regarding
the referral fees SIB paid SGC. However, the Enforcement staff felt that bringing an
action against SGC for those violations would have been “lame.” See ENF5Staff Testimony
                                                                        Atty
Tr. at 34. In addition, the legal remedies for those violations would have fallen short of
stopping the CD sales. The remedies available for the violations that the staff considered
were “small potatoes.” Id. Consequently, the Enforcement staff believed that if they
could not bring a case for “offering fraud, [the Stanford investigation was] not worth
pursuing.” Exhibit 141.

        However, the greatest obstacle to the SEC’s efforts to investigate its suspicions
that the SIB CDs were a Ponzi scheme, i.e., the complete lack of information produced
by SGC regarding the SIB portfolio that supposedly generated the CDs returns, also
presented the SEC with an opportunity to bring a significant “offering fraud” action
against SGC for violation of Section 206. Simply, the filing of such an action against
SGC could have potentially given investors and prospective investors notice that the SEC
considered SGC’s sales of the CDs to be fraudulent. As a practical matter, many of
Stanford’s victims would not have purchased the CDs with such notice. Moreover, had
the SEC successfully prosecuted such an action against SGC, SGC could have been
permanently enjoined and barred from selling the CDs as an investment adviser.


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         A.             The Issue of Whether the Stanford CDs Were Securities Was
                        Irrelevant to an Action Against SGC For Violations of the Anti-Fraud
                        Provisions of the Investment Advisers Act

         All of the possible causes of action considered by the FDWO Enforcement staff in
 2005 required that the SEC establish that the SIB CDs were securities. The Cohen
 Memorandum’s discussion of a possible emergency action included the following
 assertion, DPP, WP
DPP, WP
                    Exhibit 144 at 4. Cohen then noted:
                   DPP, LE, WP




Id. at 4, n. 11 (emphasis in original).
       ENF Staff Atty
       5       confirmed that there was a long period of time during which the Stanford
matter was analyzed and discussed. ENF Staff Atty Testimony Tr. at 37. ENF Staff Atty described these
                                    5                                  5
discussions as follows:

                        [A] lot of the discussion [before requesting and obtaining
                        the formal order in October 2006] was onDPP, WP
                        DPP, WP                                              DPP, WP
                                like how -- you know, is this going to be --
                        DPP, WP     What if we get to this point and DPP, WP
                                    So we lose on something like that. And there
                        was definitely, you know, a feeling that DPP, WP
                        DPP, WP




Id.

        In the context of the Enforcement staff’s request for a formal order in the Stanford
matter, the SEC’s Office of General Counsel commented:
                   AC, DPP, LE, WP




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                AC, DPP, LE, WP




 October 24, 2006 Memorandum to the Commission from the SEC’s Office of General
 Counsel, attached as Exhibit 152, at 2-3.

         More recently, in response to a question from Mark Adler, Deputy Chief
 Litigation Counsel in the SEC’s Enforcement Division, about whether the SEC could
 have filed an action against SGC earlier, Kimberly Garber, Associate District
 Administrator for Examinations in FWDO, explained that the SEC had been unable to
 take action against SGC because DPP, WP
DPP, WP


 May 6, 2009 E-mail from Kimberly Garber to Mark Adler, attached as Exhibit 153.
 Specifically, Garber stated:

                  There may be legal theories as to how we could have
                  stopped them from doing business in the US, and we
                  considered a number of approaches along the way, however
                 DPP, WP




 Id.

         As the SEC stated in its brief filed in support of its February 16, 2009 action
 against Stanford, fraud claims brought under Section 206 of the Investment Advisers Act
 do not require that the fraud involve a security. See Exhibit 149 at 26. The SEC
 expressly argued:

                  Through their deceitful and fraudulent conduct in selling
                  the CDs and SAS, Defendants violated the antifraud
                  provisions of the Investment Advisers Act. This is true,
                  even if the Court, for the sake of argument, determines that
                  the defendants’ fraud was not in connection with the offer,
                  sale or purchase of securities for purposes of Section 17(a)
                  of the Securities Act or Section 10(b) of the Exchange Act.

 Id. (emphasis added). The SEC further argued in its brief:

                  Section 206 establishes federal fiduciary standards to
                  govern the conduct of investment advisers. The fiduciary
                  duties of investment advisers to their clients include … the
                  duty to employ reasonable care to avoid misleading clients.


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                   An adviser has “an affirmative obligation to employ
                   reasonable care to avoid misleading [his or her] clients.”

Id. at 27 (citations omitted). 88

       Had the FWDO Enforcement staff considered pursuing a fraud case against
Stanford under Section 206, the perceived obstacles to filing an action could have been
eliminated.

         B.        The Enforcement Staff Did Not Consider Filing a Section 206 Case or
                   Conducting a Section 206 Investigation

                   1.       The 2005 Referral Did Not Mention Section 206

        The 2005 Enforcement Referral did not discuss any potential violations of the
Investment Advisers Act, including Section 206. See Exhibit 101. In fact, it did not even
mention that SGC was a registered investment adviser. Id. It did not contain any
reference to the previous examinations, including the 1998 and 2002 investment adviser
examinations, which would have necessarily included the information that SGC was a
registered investment adviser. Id.

        Prescott explained that she did not reference the prior examinations because she
thought the 2004 Examination gave Enforcement enough information to act upon.
Prescott Testimony Tr. at 14. 89 Although the 2005 Enforcement Referral did not
specifically discuss Section 206 of the Investment Advisers Act, it did state:

88
     A former FWDO Examination branch chief who asked not to be identified testified that, generally:
         Once the attorneys figured out that Section 206 of the Advisers Act, antifraud provision,
         does not contain the word “security,” man, you can make a lot of hay out of 206 (1) and
         (2). We’d make them look good bringing in a case and just charging 206(1) and (2).
         You don’t even have to have a security involved.
Unidentified Former FWDO Examination Branch Chief Testimony Tr. at 58.
89
     Prescott testified that, while drafting her 2005 referral memorandum, she became aware that there had
been previous examinations, but she did not review them because she felt there was enough information in
the 2004 examination report to support a referral. Prescott Testimony Tr. at 13-14. However, she testified
that until 2009, she was unaware of the 1998 Stanford MUI, which was referenced in both the 1998 and
2002 investment adviser examination reports. Id. at 12; Exhibit 70 at 2; Exhibit 55 at 1. Wright testified
that Prescott’s position in the Examination group was Senior Special Counsel to the B-D examiners, and,
thus, she would not have interacted with the investment adviser examiners. Wright Testimony Tr. at 41,
59-60. As discussed below, the failure to include information from the 1998 and 2002 investment adviser
examinations in the 2005 Enforcement Referral made by the B-D Examination staff may have had
significant consequences for the conduct of the Enforcement investigation.
                                                                                            Staff Acct
     As further evidence of the self-imposed wall between the two examination groups, 1         the examiner
on the 1997 B-D Examination of SGC, testified that no one from the Investment Advisor examination
group contacted him in connection with the 1998 or 2002 exams.Staff Acct 1Testimony Tr. at 28, 38-39. Staff Acct 1
testified that the Investment Advisor and B-D Examination groups “just kind of never talked to each
          (Footnote continued on next page.)

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                  SGC claims that it keeps no records regarding the
                  portfolios into which SIB places investor funds and that it
                  can not get this information from SIB. Indeed, SGC has
                  related to the Staff that SIB claims it cannot divulge the
                  specifics of how it has used customers’ deposits, based
                  (variously) upon the bank secrecy laws of Antigua and
                  SIB’s own internal “Chinese Wall” policies with SGC.

Exhibit 101 at 2 (footnotes omitted).

                  2.           Neither Cohen’s nor Preuitt’s November 2005 Memorandum
                               Discussed a Section 206 Violation

        Similar to the 2005 Enforcement Referral, the Preuitt and Cohen Memoranda did
not discuss a potential Section 206 claim, nor did they reference the fact that SGC was a
registered investment adviser. Cohen’s memorandum did state:
                 DPP, LE, WP




Exhibit 144 at 6. Cohen then discussed SGC’s DPP, LE, WP
DPP, LE, WP
                            and concluded that the SEC would DPP, LE, WP
DPP, LE, WP
                                               . Id. at 7. According to the Cohen
Memorandum:
                DPP, LE, WP




                DPP, LE, WP




Id. at 39.IA Examiner testified that, in connection with the 1998 SGC examination that he conducted, he gained
          1
some familiarity with the 1997 B-D Examination, “but not a great deal.” IA Examiner Testimony Tr. at 15-16.
                                                                            1




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                    DPP, LE, WP




 Id. at 6-7 (emphasis in original).
                                              DPP, WP
              Cohen concluded that it was
AC, DPP, WP
                   regarding the SIB CDs:
                    DPP, LE, WP




 Id. at 8-9. 90

                       3.         When the FWDO Staff Met With Addleman, She Was
                                  Unaware That SGC Was an Investment Adviser

        Addleman testified that she was “unaware” that the Investment Adviser
 Examination staff had done an examination of SGC in Houston in 1998 and 2002.
 Addleman Testimony Tr. at 40. In fact, Addleman testified that she was not aware that
 SGC was a registered investment adviser when the staff briefed her on the matter in
 November 2005. Id. at 34-35. Addleman only learned that SGC had been a registered
 investment adviser during her OIG testimony. Id. at 40-41. Her reaction to that
 information was striking, as evidenced by the following exchange:

                       Q: [T]he fact is … that Stanford was a dual registrant, a
                          broker-dealer and an investment adviser. You didn’t
                          know that, correct?
                       A: As I sit here, it’s a surprise.


 90 IA Examiner 2
              testified that, in his experience, the Enforcement attorneys in FWDO were not “very familiar
 with the Investment Advisors Act.” IA Examiner Testimony Tr. at 77.
                                        2




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                            …
                            Q: I take it … that you were unaware that the Investment
                               Adviser exam staff had done an exam of Stanford
                               Group Company in Houston in 1998 and 2002. ….
                            A: I was not aware of that.
                            …
                            Q: … And I assume that you were unaware that the 2002
                               exam had resulted in a referral to enforcement to bring,
                               among other things, a [Section] 206 case. …
                            A: I didn’t know that, no.

 Id.

         Because the Enforcement staff was not familiar with any of the findings of the
 investment adviser examinations, bringing a Section 206 case against SGC for its
 admitted failure to conduct any due diligence regarding Stanford’s investment portfolio
 was never considered. As discussed below, that option would have been “a potentially
 straightforward way to have attempted to approach [the Ponzi scheme].” Id. at 45-46.

                C.          The Enforcement Staff Could Have Filed a Section 206 Case With the
                            Potential For Shutting Down SGC’s Sales of the SIB CDs and/or
                            Discovering Evidence of the Ponzi Scheme

        As discussed above, the 2002 Examination Report discussed SGC’s failure to
 conduct any due diligence regarding the SIB CDs. IA Examiner 2 testified about that failure as
 follows:

                            [F]or all of [SGC’s] investment advisory clients they were
                            [a] fiduciary and whenever they refer that client to some
                            other investment product, whether it’s a security or not,
                            they were supposed to do some due diligence into doing
                            that. So we asked them: Give us the due diligence file for
                            this offshore bank. We want to see [] everything you
                            looked at before you made this recommendation to refer
                            these clients over. The only thing we got if I remember
                            right was just the file with the financial statements and
                            maybe a couple other things in there. So IA Examiner 1
                            and I took the position that that wasn’t enough.
IA Examiner 2
                Testimony Tr. at 48-49.
            IA Examiner 1
                            explained SGC’s failure to conduct the required due diligence as follows:

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                      Q: [SGC] needed to know what SIB’s portfolio was that
                         supported the CD rates, right?
                      A: Right. I mean, they did that with all of their managers
                         in the Schedule A in the wrap program. They were
                         constantly reviewing to make sure these managers were
                         complying with their investment mandates, staying
                         within their universe and all those things. They didn’t
                         do any of that with Stanford International.

IA Examiner 1
                Testimony Tr. at 113.

         Had the SEC successfully prosecuted an injunctive action against SGC for
 violations of Section 206, an anti-fraud provision, it could have completely stopped the
 sales of the SIB CDs through the SGC investment adviser. Moreover, as a practical
 matter it could have significantly impacted the sales of the CDs through the SGC broker-
 dealer. As Prescott described in the 2005 Enforcement Referral:

                      Certainly, the ability to sell through a U.S. based broker-
                      dealer gives SIB an imprimatur of legitimacy to foreign
                      investors. It is quite possible that action by the
                      Commission against SGC for its role in the CD offering
                      could cause the entire scheme to collapse.
                                                  ENF BC 3
 Exhibit 101 at 6 (emphasis in original).     acknowledged that a case against SGC that
 would have stopped its sales of the SIB CDs would have been worth bringing in 2005.
ENF BC 3
         Testimony Tr. at 71-72. 91

        As noted above, Addleman was not aware that SGC was a registered investment
 adviser until her OIG testimony. During that testimony, Addleman testified regarding the
 missed opportunity to have filed a Section 206 action against SGC, in the following
 exchange:

                      Q: … [The examiners’ Section] 206 argument was
                         focused on the fact that the Investment Adviser in

 91                                                              Exam Sr Cnsl
      Basagoitia had stated in her November 18, 2004 e-mail to
            Most Clients open accounts because they believe the B-D’s clearing agreement with Bear
            Stearns provides them with account protection. They also believe in the soundness of US
            laws. Should the Bank not have US representation, clients would not invest as they do at
            the Bank.
 Exhibit 106.


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                      Houston would not provide them any information about
                      … what [SIB] was investing the proceeds in to generate
                      these returns. And, in fact, affirmatively represented
                      that they had no such information, alternatively saying
                      that there was a prohibition in Antiguan bank secrecy
                      laws that prevented SGC from getting that information
                      and then secondly … claiming there was a Chinese wall
                      between the entities. And so the theory that they
                      proposed in essence was that … the investment adviser
                      did not have enough due diligence to satisfy its
                      fiduciary duty to its clients under either [Sections]
                      206(1) [or] 206(2). … [D]o you have an opinion on
                      the viability of that case?
                 A: As I sit here, I have a bit of a pit in my stomach,
                    because I wish I had known that. … Adviser cases are
                    always easier than broker-dealer cases because of the
                    heightened fiduciary duty standard. And it always does
                    give an alternative way to look at facts. If I knew that
                    and I overlooked it, I apologize. If I didn’t know it, I’m
                    a little frustrated but.
                 Q: But if you had known that at that time, would that have
                    been a very good avenue to bring a case against
                    Stanford under Section 206 of the Advisers Act?
                 A: Well, I don’t want to overstate it, but it would have
                    been an alternative theory that has some potential, yeah.

Addleman Testimony Tr. at 40-43.

       The OIG then asked Addleman to review the 2002 Examination Report. See Id. at
43-44. After reviewing that report, Addleman testified in the following exchange:

                 Q: … [D]o you have a sense of the viability or the
                    potential for bringing a Section 206 case in order to get
                    into court and if nothing else shut down the sale of the
                    CDs by the Investment Adviser entity until they had
                    adequate due diligence and perhaps through the civil
                    discovery process … obtain the evidence of a Ponzi
                    scheme. Do you have an opinion about that?
                 A: I do. I think that the issue when you’re dealing with an
                    adviser versus a broker-dealer here gives the ability to
                    sort of add on that due diligence component …. [W]hen
                    you put it in the fiduciary realm and you have, for

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                      example, the chart in here that shows the difference
                      between what the U.S. CDs were paying and this
                      purportedly Antiguan CD, there’s reason to raise a red
                      flag that would require additional fiduciary duties upon
                      an adviser that wouldn’t or might not be there with
                      respect to a broker. So, yes, I see that as a potentially
                      straightforward way to have attempted to approach it. 92

Id. at 45-46 (emphasis added).

XI.     HAD THE SEC FILED AN ACTION EARLIER, SIGNIFICANT
        INVESTOR LOSSES COULD POTENTIALLY HAVE BEEN AVOIDED

        The 1998 Examination Report estimated that “SGC brokerage and advisory
clients may have invested as much as $250 million in the CDs.” Exhibit 55 at 1. The
2002 Examination Report stated, “SIB’s financial statements for the year ended
December 31, 2001, discussed in more detail below, indicated total ‘certificates of
deposit’ of $1.1 billion.” Exhibit 70 at 10. The 2002 Examination Report estimated that
$640 million of those outstanding CDs were attributable to SGC. Id. at 2. The 2004
Examination Report indicated that SIB had $1.5 billion of outstanding CDs, of which
$227 million were held by U.S. citizens. Exhibit 98 at 4.

        The growth in sales of the fraudulent CDs continued to increase at an alarming
rate after the 2004 Examination. The SEC’s brief filed in support of its February 16,
2009 action against Stanford described that growth as follows:

                 SIB sold more than $1 billion in CDs per year between
                 2005 and 2007, including sales to U.S. investors. The
                 bank’s deposits increased from $3.8 billion in 2005, to $5
                 billion in 2006, and $6.7 billion in 2007. SIB markets CDs
                 to investors in the United States exclusively through SGC
                 advisers pursuant to a Regulation D private placement. In
                 connection with the private placement, SIB filed a Form D
                 with the Commission.




92
     In contrast to Addleman, Cohen testified that a Section 206 claim would have been just as difficult to
bring as a Section 10b-5 claim. Cohen Testimony Tr. at 80-86. However, it should be noted: (1) a Section
206 claim would not have posed the jurisdictional question of whether the SIB CDs were securities; (2)
SGC’s lack of due diligence regarding its sales of the SIB CDs would have more easily supported a Section
206 fiduciary-based claim than a claim that those sales violated the NASD suitability rule; and (3) Section
206(2) has a lower scienter standard in which only a showing of negligence is necessary for a successful
action. See Exhibit 149 at 26-27.


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Memorandum of Law in Support of Motion for Ex Parte Temporary Restraining Order,
Preliminary Injunction and Other Emergency Relief (“SEC Brief”), filed on February 17,
2009, attached as Exhibit 149 at 7. In its Complaint filed on February 16, 2009, the SEC
alleged that “SIB, acting through a network of SGC financial advisors, has sold
approximately $8 billion of self-styled ‘certificates of deposits’ …” Exhibit 1 at ¶ 2.

        A Stanford Victims Coalition survey indicated that losses could have potentially
been minimized for a significant percentage of investors had the investors been aware of
an investigation or examination of Stanford in 1997, when SEC examiners first raised
concerns about the fund. 93 Nearly a third of the Stanford investors who responded to the
survey indicated that they invested with Stanford prior to 2005. See Exhibit 154 at 1.
Approximately 95% of the 211 responding Stanford investors stated that knowledge of an
SEC inquiry would have affected their decision to invest. See id. at 4. One Stanford
victim, who invested the money that she “saved through several years of business, nights
working late and skipping vacations [she] could have taken with [her] family,” said that
had she “known that Stanford Group was ever under investigation by the SEC, [she]
would not have bought at all.” See February 2010 Inspector General Survey Response
Excerpts, attached as Exhibit 155 at 1; February 2010 Stanford Victims Coalition Survey
Response Excerpts, attached as Exhibit 156 at 1. 94 Two other investors said that an SEC
investigation “would have been a very large red flag” and they “would have transferred
out of that bank immediately.” Exhibit 156 at 2.

        Indeed, over 99 percent of the surveyed investors had no knowledge of the SEC’s
inquiry at the time they first invested. Exhibit 154 at 3. One Stanford investor stated, “[I]
[h]ad no knowledge of any prior SEC complaints or inquiries. I researched on [the]
internet and could find no registered complaints against Stanford. Obviously, [I] would
not have invested with Stanford if there was any sign of trouble.” Exhibit 155 at 2.

        The action taken by SEC Enforcement as part of its investigation in June 2005 in
sending a questionnaire out to Stanford investors in an attempt to identify clear
misrepresentations by Stanford, as discussed in Section VII.A of this report, raised
significant concerns among the investors. Rawl and Tidwell Interview Tr. at 8. Mark
Tidwell, a vice president and financial adviser at Stanford from 2004 through 2007 who
later contacted the SEC with concerns about Stanford, said that his phone “lit up like a
Christmas tree the morning [the questionnaire] went out.” Id. This flurry of phone calls
from his clients led Tidwell to believe that had the SEC sent clients questionnaires prior
to 2005, it would have “absolutely” raised red flags with clients, and made them more

93
    In February 2010, at the request of the OIG, the Stanford Victims Coalition, an organization of
Stanford investors, sent a survey to investors in the SIB CDs. The Stanford Victims Coalition received 211
responses to its survey. See February 2010 Inspector General Survey Summary, attached as Exhibit 154.
Respondents to the survey certified that all answers provided were correct to the best of their knowledge.
94
     The Stanford Victims Coalition conducted its own survey of Stanford investors in February 2010.




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hesitant to invest in Stanford at earlier dates. See id. at 7, 8. Rawl also testified that the
2005 SEC investor questionnaire led to “significant concerns” by investors in the CDs.
See id. at 7.

        However, even after investors received the questionnaire about Stanford in June
2005, many continued to invest because financial advisers told them that the fund had
been given “a clean bill of health” by the SEC. Exhibit 155 at 3. Advisers told their
investors that the inquiry was “routine,” a result of a “disgruntled employee,” and that
“the investigation was complete and fined SGC a very small amount for some ‘sloppy
accounting’….” Id. at 29, 37. In fact, financial advisers used the fact that the SEC had
previously examined Stanford to reassure investors about the fund’s safety. One investor
said that her broker told her that “regulators came constantly” and everything at Stanford
was “perfect.” Stanford Victim Interview Memorandum, attached as Exhibit 157.
Investors were told that the SEC regulated Stanford and Stanford had “always passed
with flying colors.” Exhibit 155 at 4. Ironically, this gave investors “comfort knowing
that [Stanford was] being watched.” Id. at 5. Tidwell noted that he was told “there was
never an issue with any regulatory body,” that there may have been some regulatory
“grumbling here or there, but all those matters were closed” and that anything that a
governmental agency had looked into was “fine,” and there was “nothing ongoing.”
Rawl and Tidwell Interview Tr. at 10-12.

        Tidwell stated that it gave him comfort when he was told by Stanford
management that nothing was found by any regulatory inquiries, and that his
understanding that regulatory entities looked into Stanford and found nothing was an
“endorsement.” Id. at 12-13. Stanford officials were able to persuasively represent that
Stanford had been given a “clean bill of health” by the SEC because, in fact, Stanford had
been examined on multiple occasions and only been issued routine deficiency letters;
deficiencies that they purportedly remedied. The 1997, 1998, 2002 and 2004 SEC
examinations of SGC all resulted in deficiency letters sent from the FWDO examiners to
SGC. SGC responded to each of these deficiency letters in a manner that would allow
them to claim that they had responded to and addressed the SEC’s concerns. See, e.g.,
October 17, 1997 Letter from Lena Stinson to Staff Acct 1      (“[T]he deficiencies have
been noted and your recommendations implemented.”), attached as Exhibit 158.

       Some even increased their investments due to confidence in the SEC’s audits.
One investor stated, “[I]n late 2008 I increased my CD investment by 150% due to the
confidence in the SEC audit … and the approval of the SEC.” Exhibit 155 at 2. 95


95                                       ENF BC 3
    Ironically, Enforcement branch chief               testified that he was concerned that if the SEC
brought a technical violation against SGC, that could do more harm than good in the sense that SGC would
publicize that the SEC has been investigating them and all that was wrong was a minor issue. ENF BC 3
Testimony Tr. at 70.




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       One investor reported that her husband contacted the SEC to inquire about
Stanford’s stability. See Stanford Victim Interview Memorandum. This investor said
that SEC representative stated the fund was “very solid,” “the most solid group in Texas.”
Id. She said that the SEC confirmed that Stanford was a “prestigious” fund that had been
“functioning well for 18 years.” Id.

         In addition, investors reported that they relied on favorable remarks concerning
Stanford by Federal government leaders, including a 2008 commendation from President
George W. Bush, in making their decision to invest in Stanford. See February 20, 2008
letter from George W. Bush, attached as Exhibit 159. For example, one investor stated:
“[T]here was nothing but praise by our congressmen, senators, and our own President
Bush [as to] how wonderful [t]his company and man was and the safest sound company.”
Exhibit 155 at 6. Another investor stated that “SGC had an impec[c]able record and had
received many awards and commendations[,] one even from President Bush commending
Allen Stanford for his exemplary conduct in the business community.” Id. at 7.

XII.    THE SEC ENFORCEMENT STAFF’S FAILURE TO BRING AN ACTION
        AGAINST STANFORD EARLIER WAS DUE, IN PART, TO THE
        STAFF’S PERCEPTION THAT THE CASE WAS DIFFICULT, NOVEL,
        AND NOT THE TYPE OF CASE FAVORED BY THE COMMISSION

        A.       Senior Enforcement Management Emphasized the Need For “Stats”

         Degenhardt told the OIG that he “absolutely felt that it was important to convey to
the Commission the number of cases that his office brought.” Degenhardt Interview
Memorandum at 2. He said the regional offices were “heavily judged” by the number of
cases they brought when he first came to the SEC. Id. Degenhardt stated that after 1997,
the FWDO brought more cases than any other regional office on a per-capita basis. Id.
He said the FWDO, the third-smallest regional office, was always in the “top three” for
overall number of cases brought from 1997 through 2005, and in 2001, the FWDO
brought the highest number of cases of any regional or district office. Id. He emphasized
that this was a “source of great pride” for himself, Spencer Barasch as the head of
Enforcement in the FWDO, and the FWDO as a whole. Id.

        Degenhardt described himself as having been “very outspoken” while he was at
the SEC, but felt he was “bullet proof” because of the high number of cases that the
FWDO brought and, as a result, the Commission “could not get rid of him.” Id. at 4.
Degenhardt said he would often “fight with the bureaucrats in DC” and would tell the
staff, “You are my shield, because of the high numbers of cases you are bringing, so if
you like me working here, keep bringing a lot of cases.” Id.

       According to Degenhardt, Barasch was even more concerned about “stats” than
Degenhardt was, stating that “it was very important to Barasch that the FWDO bring a
high number of cases.” Id. at 4. Degenhardt stated that the FWDO’s high number of
cases “was a feather in Barasch’s cap.” Id.

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        Barasch told the OIG:

                 [E]very regional and district office was very motivated to
                 bring as many cases as possible, because that’s --you were
                 judged by the number of cases you brought and then the
                 quality of the cases you brought. And it was both. And the
                 number of cases was extremely important. …

Barasch Interview Tr. at 28. Like Degenhardt, Barasch told the OIG that there was one
year in which the FWDO brought more cases than any other regional or district SEC
office. Barasch Interview Tr. at 28-29.

        Cohen also acknowledged the primacy of “stats” as follows:

                 Everybody was mindful of stats. … Stats were recorded
                 internally by the SEC in Washington. … I think when I
                 was assistant director, there was a lot of pressure to bring a
                 lot of cases. I think that was one of the metrics that was
                 very important to the home office and to the regions.

Cohen Testimony Tr. at 105. Cohen testified that the pressure to bring a lot of cases
came from Barasch and Degenhardt, and that Barasch and Degenhardt would compare
the FWDO’s stats with those of other offices. Id. at 108-109. Cohen testified that the
FWDO was “very proud” of its productivity. Id. at 109 ENF BC 3 also testified that he
understood that there was pressure on regional offices to show that they had brought “X”
number of cases per year in order to show that they were productive. ENF BC 3 Testimony
Tr. at 75-76 ENF BC 3 also testified that the FWDO was well-known for bringing a lot of
cases and that its reputation for doing so was a source of pride within the office. Id. at
78.

         Wright observed that after he left FWDO’s Enforcement group, “Barasch [put] a
lot more pressure on people to produce numbers.” Wright Testimony Tr. at 18. Wright
testified that the pressure to produce numbers also came from Degenhardt, stating:

                 [Degenhardt] came from a big law firm, and he quickly
                 decided the way to impress people was to come up with
                 lots of numbers. And Spence, of course, was part of that.

Id. at 18-19. Wright testified that Barasch “was pretty upfront” with the Enforcement
staff about the pressure to produce numbers and communicated to the Enforcement staff,
“I want numbers. I want these things done quick.” Id. at 21-22.

         Wright also observed a change in emphasis when Addleman replaced Barasch as
Associate District Director for Enforcement. Wright Testimony Tr. at 49-50. Wright
testified that Addleman was not so enamored with the numbers like Barasch and

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Degenhardt were and that Addleman “was much more concerned about the kind of cases
you’re bringing and why you’re bringing cases.” Id.

        Addleman acknowledged that before she became the Associate District Director
for Enforcement, “there was some internal pressure within the Fort Worth office to
generate numbers … of cases.” Addleman Testimony Tr. at 27. By contrast, she agreed
that while obviously it’s important to have numbers, it’s also important to have
substantial cases, and even cases that are complicated or difficult or that may involve
some work to get through the Commission. Id. Addleman described this “culture shift”
as follows:

                 My emphasis was less on numbers than the [Degenhardt
                 and Barasch] administration … where people were of the
                 belief that the numbers were the only thing that mattered …
                 And there needed to be some, in my opinion, reality
                 brought back to what the enforcement program is supposed
                 to be. … So, yes, I think there’s definitely a culture shift
                 and Jeff [Cohen] had a little trouble with some of that I will
                 admit. … He had some tougher cases. I won’t say that he
                 only had easy things, but in a way that he could sort of
                 charge ahead on the things that he knew were going to be
                 fruitful and give rise to a number as opposed to a case that
                 didn’t have that degree of certainty, if you will, would be a
                 factor in his analysis.

Id. at 28-29.

       Walter Ricciardi, former Deputy Director of Enforcement from 2005 through
2008, was quoted in the April 16, 2009 Bloomberg article, Stanford Coaxed $5 Billion as
SEC Weighed Powers, as follows:

                 SEC enforcement offices were evaluated on the number of
                 cases, or “stats,” they brought in, rather than on the
                 seriousness or difficulty of action, said Walter Ricciardi,
                 the agency’s deputy chief of enforcement from 2005
                 through 2008, in a speech April 1 in New York. “So if you
                 brought an Enron, that’s one,” Ricciardi said. “If you
                 brought a WorldCom, that’s two.” Delisting 135 defunct
                 companies in a week for failing to file annual reports gave
                 an enforcer 135 cases to count, he said. “Maybe certain
                 investigations would have gotten put in the right place and
                 in the right posture” with a different evaluation system, he
                 said.



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 Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


 Alison Fitzgerald and Michael Forsythe, Stanford Coaxed $5 Billion as SEC Weighed
 Powers, Bloomberg, April 16, 2009, attached as Exhibit 160 at 4. See also Judith Burns,
 SEC’s Near-Record Enforcement Results Raise Questions, Dow Jones, October 9, 2008,
 attached as Exhibit 161.

              B.          The Pressure For “Stats” May Have Discouraged the Staff From
                          Pursuing Difficult Cases

         Wright testified that the pressure for numbers incentivized the Enforcement staff
 to focus on easier cases, the “quick hits.” Wright Testimony Tr. at 18. According to
 Wright, as a result of the “pressure on people to produce numbers[,] … anything that
 didn’t appear … likely … to produce a number in a very short period of time got pretty
 short shrift.” Id. at 18. 96 A former FWDO Examination branch chief, who asked not to
 be identified, agreed that the FWDO Enforcement staff “were concerned about the
 number of cases that they were making and that perhaps if it wasn’t a slam-dunk case,
 they might not want to take it because they wanted to make sure they had enough
 numbers because that’s what they felt the Commission wanted them to do.” Unidentified
 Former FWDO Examination Branch Chief Testimony Tr. at 86-87.
          BD Examiner 1
                 testified that “examiners will refer great cases to Enforcement, and they
 just sit there … for a variety of reasons.”BD Examiner Testimony Tr. at 54 BD Examiner testified that
                                              1                             1

 one reason that great cases “sit” in Enforcement is that the Enforcement staff takes the
 approach that, “Yes, there may be some fraud here, but it is not a slam dunk, [and] we are
 not going to try to go to court if it is not a slam dunk.” Id. Similarly IA Examiner 2 testified
 that he “got the sense that [the Enforcement staff] did not want to lose any cases. So if
 there was a high risk of losing a case, there was a reluctance for them to take it.” IA Examiner 2
 Testimony Tr. at 77.

        Addleman acknowledged that when she became the Associate District Director
 for Enforcement in the FWDO, there was a feeling that the Commission was possibly
 more receptive to clear-cut cases, in which you have clear victims already losing money,

 96
      Wright recalled one case that he had assigned to Prescott when Barasch was her branch chief that he
 later learned Barasch had instructed her not to work on because it was not going to be a quick hit. Wright
 Testimony Tr. at 22-24. Ironically, that case bore many similarities to the Stanford matter. Id. Wright
 testified that the matter “involved insurance, and while presumably they were selling insurance, it was
 really a Ponzi scheme.” Id. at 23. Wright believes that Barasch told Prescott not to work on it DPP, WP
DPP, WP


     But, as Wright explained, “the case got transferred [to another SEC office]. … [T]hey did a little
 research and came up with the idea that what they were selling was not an insurance contract but really a
 security. … [A]nd it became one of these [cases] where you rush to the courthouse to get a temporary
 injunction and restraining order and all the rest.” Id. at 23. Wright reflected on the parallels between that
 case and Stanford, stating, “Again, you get back to the number aspect, you know. If you got a problem
 with determining whether or not something is a security, just like in Stanford, then it’s going to be harder to
 do. It’s not going to be a quick hit. You’re not going to get a number quicker.” Id. at 24.


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and that if they were going to bring a case, they should bring a case that is more clear-cut
and has potential victims, so it’s easier to get through the Commission and generate their
numbers. Addleman Testimony Tr. at 27. Similarly, Preuitt testified:

                 [Stanford] was also a very difficult case. It was going to
                 use a lot of resources, and that was unappealing.

                 And very much during the Cox administration, there was
                 concern that the Commission wasn’t going to take anything
                 unless it was just nailed down and perfect and beautiful and
                 that you might receive a lot of negative feedback unless
                 you had a case like that. And people wanted to avoid that
                 sort of negative response. …

December 14, 2009 Preuitt Testimony Tr. at 55-56.

        As discussed below, at some point, FWDO management was instructed to focus
less on Ponzi scheme cases. However, as Preuitt explained, the FWDO was willing to
bring Ponzi scheme cases if they were easy cases:

                 [T]o be fair, the Fort Worth office has been one of the most
                 aggressive offices in terms of Ponzi schemes.

                 … But most of those are really quite easy to prove, and you
                 can get into court quickly. And we were just very
                 aggressive on doing those.

                 So during Hal and Spence’s tenure, we did many Ponzi
                 schemes; but they were small in comparison. They were
                 much -- you know, very easily proven. Once they start to
                 break and you can get some bank records, I mean, in
                 comparison, the difficulty of those cases is, you know – it
                 doesn’t compare.

Id. at 56-57.

        Wright testified that Stanford “was not going to be a quick hit. It was going to be
a dogfight.” Wright Testimony Tr. at 18. Accordingly, Wright explained that Stanford
was not considered as high priority of a case as easier cases. Id. at 18-19. Similarly,
Preuitt told the OIG that Cohen did not want to pursue the investigation “[b]ecause it was
going to be hard to prove….” Preuitt Interview Tr. at 18-19. Preuitt testified that Cohen
only wanted to bring cases that were slam dunk, easy cases. January 26, 2010 Preuitt
Testimony Tr. at 42.



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        Preuitt testified that no one in Enforcement ever disagreed with her conclusion
that Stanford was probably a fraud. December 14, 2009 Preuitt Testimony Tr. at 45.
According to Preuitt, Enforcement’s unwillingness to investigate Stanford “was always
about … barriers. … [Stanford] was seen [by Enforcement] as a fantastically difficult
case, and I couldn’t convince them to do it.” Id. at 45-46. 97

       The Enforcement staff perceived the Stanford case was difficult, in part, because
there was no evidence that the Ponzi scheme was collapsing. The Cohen Memorandum
included the following observation:
                DPP, LE, WP




Exhibit 144 at 3-4 (emphasis in original). 98

        On October 25, 2004, while the 2004 examination was ongoing, Wright
forwarded to Preuitt an e-mail chain from early-June 2003 that discussed Enforcement
staff’s view at that time that a Stanford investigation was too difficult to undertake.
October 25, 2004 E-mail from Hugh Wright to Julie Preuitt, attached as Exhibit 162.




97
     Degenhardt and Barasch vigorously denied that the FWDO was averse to difficult investigations
during their tenure. Degenhardt told the OIG that, in addition to doing “kick in the door and grab” cases,
the FWDO had worked on complex cases. Degenhardt Interview Memorandum at 2. He added that he felt
the FWDO “worked very hard in his tenure on all types of cases (including big cases)….” Id. at 6.
Barasch told the OIG that he had brought several cases against broker-dealers and investment advisers.
Barasch Interview Tr. at 30-35. Barasch also stated that he was instructed to “focus[] on working what
would be deemed to be good core cases for the Commission.” Id. at 13.
98 ENF Staff
  Atty 5     testified that she believed it was difficult to bring a Ponzi scheme case before the scheme began
to unravel because “you don’t have anybody complaining about anything going wrong, everybody is
happy, so they are not particularly cooperative ENF Staff Atty Testimony Tr. at 18-19. The belief that the SEC
                                                  5
could not act against a suspected Ponzi scheme was shared by the staff in the SEC’s failed Bernard Madoff
investigation. Doria Bachenheimer, the Assistant Director responsible for a 2005-2006 investigation of
Madoff that was closed without any action, testified in the OIG’s investigation of that matter that she
viewed circumstantial evidence that Madoff was running a Ponzi scheme as only “theories,” stating, “[the
red flags of a Ponzi scheme that were presented to the Enforcement staff] weren’t evidence. You know, it
wasn’t something we could take and bring a lawsuit with.” See the OIG’s September 30, 2009 Report of
Investigation, Case No. 509, entitled “Investigation of Failure of the SEC to Uncover Bernard Madoff’s
Ponzi Scheme,” at 247. Bachenheimer further explained her view that “[i]t’s very challenging to develop
evidence [about a Ponzi scheme] until the thing actually falls apart.” Id.


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                Preuitt responded:

                         I love this stuff. We all are confident that there is illegal
                         activity but no easy way to prove.[ 99 ] Before I retire the
                         Commission will be trying to explain why it did nothing.
                         Until it falls apart all we can do is flag it every few years.

 October 25, 2004 E-mail from Julie Preuitt to Hugh Wright, attached as Exhibit 162.
                                   IA Examiner 1
        But Preuitt and        testified that after the revelation that the SEC failed to
 uncover the Bernard Madoff Ponzi scheme, the staff’s view about recommending an
 Enforcement action without clear evidence that it was a Ponzi scheme changed. IA Examiner 1
 explained the change as follows:

                         I have a general recollection that our office, after the
                         Madoff situation, said, hey, is there anything that we have
                         any concern about that we haven’t done something about,
                         and I believe Stanford was one of them. …

                         And, so, we decided we need to pick this up and run with it
                         and see if we can do something because, you know, the
                         game has changed. The risk of losing is a whole lot less
                         now. We -- we’re going to be punished more for not doing
                         something than for doing something and ending up being
                         unsuccessful or whatever. That was my general feeling,
                         that we couldn’t let that sleep anymore.
IA Examiner 1
                Testimony Tr. at 136 (emphasis added). Similarly, Preuitt testified:

                         Well, clearly when Madoff broke, that changed everything.
                         People felt like now … maybe … the Commission will not
                         turn us down if we bring to them, you know, an imperfect
                         case where we don’t have all of the documents.

 December 14, 2009 Preuitt Testimony Tr. at 87-88. The OIG found in its earlier report
 regarding the Stanford investigation as follows, “Immediately after the revelations of the
 Madoff Ponzi scheme became public in December 2008, the Stanford investigation
 became more urgent for the FW[D]O and, after ascertaining that the DOJ investigation
 was in its preliminary phase, the FW[D]O staff asked DOJ if it could move forward with
 the Stanford investigation.” Report of Investigation, Case No. OIG-516, entitled


 99                                                                                               IA Examiner
      IA Examiner
      1             testified that Stanford was “a subject of common discussion in the office.”   1             Testimony
 Tr. at 122.


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 Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


 “Investigation of Fort Worth Regional Office’s Conduct of the Stanford Investigation” at
 10.

          C.       Ponzi Scheme Cases Were Disfavored by Senior Enforcement
                   Officials

         Degenhardt told the OIG that Enforcement Director Richard Walker was critical
 that the FWDO was bringing too many Temporary Restraining Order (TRO), Ponzi, and
 prime bank cases, which Walker referred to as “kick in the door and grab” cases or
 “mainstream” cases. Degenhardt Interview Memorandum at 2. According to
 Degenhardt, Walker told him that the FWDO needed to bring more Wall Street types of
 cases, like accounting fraud cases. Id. Degenhardt recalled a meeting with Walker in
 which Walker said, “[G]ive the Ponzi scheme-type cases to the states.” Id. at 4.
 Degenhardt said that he replied, “[T]he states are not capable of doing these cases,” to
 which Walker reiterated, “[G]ive them to the states.” Id.

         Barasch told the OIG that when he was hired to be the director of Enforcement for
 the FWDO, senior management in the Enforcement Division in Washington, DC, as well
 as in the Denver Regional Office (which supervised the FWDO at that time), told him to
 clean up the FWDO’s inventory and repeatedly told him that the FWDO’s emphasis
 should be on accounting fraud cases. Barasch Interview Tr. at 12-14. Barasch told the
 OIG that the pressure to focus on accounting fraud cases exponentially increased after
 Enron filed for bankruptcy on December 2, 2001, and revelations of massive accounting
 fraud followed. Barasch Interview Tr. at 24.

         Barasch further told the OIG that he was told that the FWDO was spending way
 too much of its resources on Ponzi-scheme kinds of cases, and that those resources would
 be better deployed on accounting fraud cases. Barasch Interview Tr. at 34. 100 Barasch
 specifically recalled that in November 2000, after the FWDO brought several Ponzi
 scheme cases, he was told by a senior official in the Enforcement Division (whom
 Barasch declined to name): “Spence, you know you got to spend your resources and time
 on financial fraud. What are you bringing these cases for[?]” Barasch Interview Tr. at
 31-33.

         Preuitt also testified that the FWDO “actually received a great deal of pushback
 from all of the Ponzi schemes that we were doing.” December 14, 2009 Preuitt
 Testimony Tr. at 57. Preuitt explained her view that “the Commission is very interested
 in a fraud of the day. And [Stanford] wasn’t ever the fraud of the day.” Id. at 55.


 100                                                                          NYRO Counsel
       In the context of another Ponzi scheme matter investigated by the FWDO,                  , a PII
PII           Counsel in the SEC’s New York office, e-mailed a FWDO attorney on January 14, 2004, “[O]f
   course [the SEC] should get out of the business of burning resources to chase Ponzi schemes ….” E-mail
   dated January 14, 2004 from NYRO Counsel      at Exhibit 163.


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According to Preuitt, Ponzi scheme cases “became the fraud of the day after Madoff.” Id.
at 56.

          D.      The SEC Bureaucracy May Have Discouraged the Staff From
                  Pursuing Novel Legal Cases

        Degenhardt told the OIG that the arduous process of getting the SEC staff’s
approval in Washington, DC to recommend an Enforcement action to the Commission
was a factor in deciding which investigations to pursue. Degenhardt Interview
Memorandum at 5. Degenhardt recalled one matter in late-2000 in which the FWDO
staff invested a lot of time in an investigation involving DPP, WP
DPP, WP
                    and felt strongly that the matter warranted an Enforcement action. Id.
at 5-6; February 11, 2001 E-mail from Harold Degenhardt to Annette Nazareth and
Robert Colby, attached as Exhibit 164. However, staff in the Division of Market
Regulation took the position that DPP, WP                          and consequently
prevented the FWDO staff from bringing the matter to the Commission’s attention. Id.

        Barasch also recalled the FWDO’s unsuccessful efforts to convince the staff in
Washington, DC, to recommend an Enforcement action DPP, WP                        .
Barasch Interview Tr. at 37-39. Barasch said his experience in that matter was a factor in
his view that the Stanford matter was not worth investigating. Id. at 39. According to a
former FWDO Examination branch chief, the Enforcement staff in Washington, DC –
specifically the staff in the Branch of Regional Office Assistance (“BROA”) 101 – would
not have let an Enforcement recommendation on Stanford go to the Commission because
of its novel characteristics. Unidentified Former FWDO Examination Branch Chief
Testimony Tr. at 79-80. He described the process of trying to get Enforcement
recommendations to the Commission through BROA as “very frustrating.” Id. at 80.

        Wright testified that “[o]ver a period of time when I was here, [the bureaucracy]
got a lot worse. … [Y]ou’ve got so many layers between what you do in Fort Worth
before it ever gets to the Commission. It’s got to go through what was called BROA at
that time. I don’t know what it’s called now. And you have a lot of people second-
guessing everything, and so, you know, what we thought were good reasons weren’t
necessarily accepted by anybody else.” Wright Testimony Tr. at 13-14.

         Addleman testified that the process of obtaining a formal order in the Stanford
matter, in particular, involved a “ridiculous” amount of review by various staff in DC,
stating:

                  As I recall, it took a longer period than was appropriate, in
                  my opinion, to get the formal order done, both in terms of
                  getting the written product out the door and then getting it

101
      BROA has been renamed the Office of Chief Counsel.


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                 through the Commission. I mean, it was something
                 ridiculous like two months of review in DC before it got on
                 a Commission calendar, those kinds of things. So there
                 were a lot of time delays that are, I suppose, different
                 points in my career more frustrating than others and this
                 might have been one of those points where I was frustrated.
                                     ENF Staff
  Addleman Testimony Tr. at 33. Atty 5    also recalled that the process of getting the staff’s
  request for a formal order before the Commission took a particularly long time because of
  jurisdictional issues and comments and pushback from other offices within the SEC.
ENF Staff Atty
5              Testimony Tr. at 47-48.

        Preuitt testified that she believed that the desire of the Enforcement staff to avoid
difficult cases was partly due to the realities of dealing with the Commission’s
bureaucracy. Preuitt described the challenges posed by that bureaucracy in the following
exchange:

                 A: [T]he gauntlet, even before you get to the part of the
                    Commission, is nightmarish, to get through market reg,
                    to get through IM, to get through general counsel. …
                    And it’s just like hitting your head against the wall
                    repeatedly over and over and over. …

                 Q: So is it your impression that in general … the harder
                    cases, more challenging cases are going to be difficult
                    to get through the bureaucratic process in
                    Washington?

                 A: A nightmare. Difficult is an understatement. It is a
                    horrific miserable process. …

                 …

                 A: [N]ot only do [the Enforcement staff] have to worry
                    about criticism if [a case] finally gets to the
                    Commission …. First [the Enforcement staff] have to
                    deal with a year or two of nightmarish difficulties, so it
                    really was no small thing for [the Examination staff] to
                    ask them to try to bring this on a more novel case. Did
                    I think it was worth it?
                    Did I think that the senior people then should have
                    supported and helped that process and protected their
                    staff in some way from the misery to make it happen, I
                    did. But I don’t want to give the impression I thought
                    this was easy to do and they could just go do it and they

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                      were stubborn. Nobody wanted to face the people in
                      Washington. They didn’t and for good reason.

January 26, 2010 Preuitt Testimony Tr. at 72-74.

        As discussed above, for seven years the SEC Enforcement staff did not open an
investigation into Stanford although every member of the staff that had examined
Stanford believed the CDs were a Ponzi scheme. That failure was due in part to repeated
decisions by Barasch to quash the matter. Immediately after he left the SEC, an
investigation of Stanford was opened. While that investigation proceeded haltingly, beset
by feuding among the staff that at times consumed more of the staff’s time and energy
than the actual investigation, as discussed below, Barasch repeatedly attempted to
represent Stanford in connection with the investigation he had blocked for seven years.

XIII. AFTER LEAVING THE SEC, BARASCH SOUGHT TO REPRESENT
      STANFORD IN CONNECTION WITH THE SEC INVESTIGATION ON
      THREE SEPARATE OCCASIONS AND DID REPRESENT STANFORD
      FOR A LIMITED PERIOD OF TIME

        A.       In June 2005, Two Months After Leaving the SEC, Barasch Sought to
                 Represent Stanford and Was Advised He Could Not Do So

       Barasch left the SEC on April 14, 2005, and joined the law firm of Andrews
Kurth, LLP later that month. See March 9, 2005 Andrews Kurth press release, attached
as Exhibit 165. On June 1, 2005, Jane Bates, SGC’s Chief Compliance Officer, asked an
Investment Adviser consultant who was working with SGC for an attorney
recommendation as follows:

                 Would you give me names of some very good attorneys
                 you would recommend that we might want to hire if
                 necessary for this SEC inquiry[?] SEC Enforcement is
                 involved and I want to be prepared. This is informal now,
                 but that could change.
                                               Stanford Empl 6
June 1, 2005 E-mail from Jane Bates to          attached as Exhibit 166. On June 2,
2005, the consultant responded and recommended Barasch specifically because of his
FWDO experience, saying,

                 . . . [R]ight off the bat my instinct would say to call
                 [Barasch] because of his specific experience in dealing with
                 the FWDO enforcement staff.

June 2, 2005 E-mail from Stanford Empl 6 to Jane Bates, attached as Exhibit 166.



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      On June 6, 2005, Bates e-mailed Yolanda Suarez, Stanford Financial Group
(“SFG”) Chief of Staff, and Mauricio Alvarado, SFG General Counsel, as follows:

                  … I talked to our [investment adviser] consultant who used
                  to be a Branch Chief at OCIE in DC and asked him if he
                  knew any individuals who knew the SEC Enforcement staff
                  in Fort Worth. He gave me the name of the following
                  individual [Barasch] who recently left the SEC and is at
                  Andrews Kurth in Dallas.

June 6, 2005 E-mail from Jane Bates to Yolanda Suarez, attached as Exhibit 167 at 2.
Suarez immediately e-mailed Alvarado, “Lets [sic] talk to him.” June 6, 2005 E-mail
from Yolanda Suarez to Mauricio Alvarado, attached as Exhibit 167.
                                         Stanford Empl 1
        On or about June 11, 2005,              , a SFG compliance employee, forwarded
the recommendation of Barasch to Robert Allen Stanford. See E-mail from Stanford Empl 1
to Robert Allen Stanford, attached as Exhibit 168. Stanford replied, “This guy looks
good and probably knows everyone at the Fort Worth office. Good job Stanford June 11,
                                                                       Empl 1

2005 E-mail from Robert Allen Stanford to Stanford Empl 1 attached as Exhibit 168.

       By June 17, 2005, Alvarado had contacted Barasch, presumably about
representing Stanford. See June 17, 2005 E-mail from Spencer Barasch to Mauricio
Alvarado, attached as Exhibit 169. On June 20, 2005, Barasch e-mailed Richard Connor,
Assistant Ethics Counsel in the SEC’s Office of General Counsel, as follows:

                  Hope all is well in this time of incredible change at the
                  SEC. I never believed that my departure would trigger so
                  many others to abandon ship…

                  I have been approached about representing an investment
                  complex called Stanford Financial Group, of Houston,
                  Texas, in connection with (what appears to be) a
                  preliminary inquiry by the Fort Worth office. The assigned
                  attorneys are (I think) ENF Staff Atty 5 and ENF BC 3 .

                  I am not aware of any conflicts and I do not remember any
                  matters pending on Stanford while I was at the
                  [C]ommission. Would you please confirm this with the Fort
                  Worth staff?[102]

102
     Connor testified that he did not recall Barasch at any point telling him that in 1998, Barasch had
participated in a decision to close an inquiry regarding Stanford; in 2002, Barasch had participated in a
decision to refer a complaint about Stanford to the Texas State Securities Board; and in 2003, Barasch had
participated in a decision not to investigate Stanford after reviewing a complaint that Stanford was engaged
in a massive Ponzi scheme. Connor Testimony Tr. at 14-15. Barasch stated that he did not mention the
         (Footnote continued on next page.)

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June 20, 2005 E-mail from Spencer Barasch to Richard Connor, attached as Exhibit 170
(emphasis added).

        Although Barasch claimed not to remember any matters pending on Stanford
while he was at the SEC, the OIG investigation found, as discussed more fully above, that
Barasch had played a significant role in the FWDO’s inquiries and examinations of the
possibility of Stanford engaging in a Ponzi scheme or similar fraud, including: (1) in
1998, deciding to close an inquiry regarding Stanford, see Section II.C; (2) in 2002,
deciding to forward the Complainant 1 letter to the TSSB and not respond to the letter or
investigate the issues it raised, see Section IV.E; (3) in 2002, deciding not to act on the
Examination staff’s referral of Stanford for investigation, see Sections IV.H and I; (4) in
2003, participating in a decision not to investigate Stanford after receiving the Confidential Source
letter comparing Stanford’s operations to the PII             fraud, see Section V; and (5) in
2003, participating in a decision not to investigate Stanford after receiving the letter from
an anonymous insider alleging that Stanford was engaged in a “massive Ponzi scheme,”
see Section V.B.

         Federal conflict-of-interest laws impose on former government employees a
lifetime ban on making a communication to or appearance before an employee of a
federal agency or court in connection with a particular matter (A) in which the United
States is a party or has a direct and substantial interest, (B) in which the former employee
was personally and substantially involved as a government employee, and (C) which
involved a specific party or parties at the time of the participation. See 18 U.S.C §
207(a)(1); see also 17 C.F.R. § 200.735-8(a)(1). Under federal ethics regulations, “[t]he
same particular matter may continue in another form or in part,” and “[i]n determining
whether two particular matters involving specific parties are the same, all relevant factors
should be considered, including the extent to which the matters involve the same basic
facts, the same or related parties, related issues, the same confidential information, and
the amount of time elapsed.” 5 C.F.R. § 2641.201(h)(5). Moreover, “[a] particular
matter may involve specific parties prior to any formal action or filings by the agency or
other parties.” 5 C.F.R. § 2641.201(h)(4).103

1998 inquiry or the 2002 matter to Connor when they spoke in 2006 because he “just didn’t remember
anything” about these events. Barasch Interview Tr. at 60. Connor agreed that this conduct would be
pretty substantial involvement in a variety of Stanford-related matters over time, and that when an
individual is seeking ethics advice to represent a particular company before the Commission, that
individual should inform the Ethics Office of the roles he played previously while at the Commission.
Connor Testimony Tr. at 15.
103
     One of the examples provided in 5 C.F.R. 2641.201 makes clear that a government employee can be
found to have participated in a particular matter even if the employee left the agency before charges were
filed. Example 1 to paragraph (h)(4) of the regulation provides as follows: “A Government employee
participated in internal agency deliberations concerning the merits of taking enforcement action against a
company for certain trade practices. He has participated in a particular matter involving specific parties
and may not represent another person in connection with the ensuing administrative or judicial proceedings
against the company.”


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         Given that all of the instances listed above involved essentially the same parties
and the same underlying issue, i.e., whether Stanford was engaging in a Ponzi scheme or
a similar fraud, in our view, Barasch had personal and substantial involvement over a
period of time in the Stanford Ponzi scheme matter that, under the applicable criminal
statute, precluded him from communicating to or appearing before the SEC regarding
Stanford. In fact, Connor agreed that Barasch’s earlier involvement in the 1998 inquiry,
the 2002 complaint referral and the 2003 Ponzi-scheme complaint, would have barred
Barasch from representing Stanford in the 2005 SEC investigation. Connor Testimony
Tr. at 13-14.

       In response to Barasch’s request to confirm that he had no conflicts, Connor
contacted ENF5Staff on June 20, 2005. See June 20, 2005 E-mail from Richard Connor to
          Atty
Spencer Barasch, attached as Exhibit 170. After Connor contacted ENF Staff Atty ENF BC 3
                                                                   5

e-mailed several members of the FWDO regarding “Stanford Group Company” and
asked:

                 Spence is looking to become engaged on the above
                 referenced matter. The matter was referred to Enforcement
                 by [the Examination staff] via a memo dated March 14,
                 2005. The memo was from Victoria, to Spence. Does
                 anyone know if Spence received the memo before his
                 departure? Did he read it? Did anyone have any
                 discussions with him about the matter? I’ll let the Ethics
                 Office know.
                                ENF BC 3
June 20, 2005 E-mail from                       to Harold Degenhardt, et al., attached as Exhibit
171.

        On June 20, 2005, Prescott responded to ENF BC 3           e-mail:

                 I had no discussions with Spence individually, but he was
                 present (along with Hal, Julie,ENF Asst and Cohen) at a
                                                     Dir 1
                 regulatory summit meeting in Austin earlier this spring at
                 which the general facts of the case were presented. I did
                 not give Spence a copy of the memo. Although it was
                 prepared for him, Julie and ENF Asst had been discussing the
                                               Dir 1

                 case, and it is my understanding that Julie forwarded the
                 memo directly toENF Asst I do not know whether ENF Asst Dir 1
                                   Dir 1

                 discussed it with Spence or not, or whether Julie sent the
                 memo to anyone but ENF Asst
                                         Dir 1

                                                        ENF BC 3
June 20, 2005 E-mail from Victoria Prescott to                         , attached as Exhibit 171.




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        On June 20, 2005, Degenhardt responded toENF BC 3              e-mail:

                 This is really no different from the prior matter.[104]

                 A memorandum was sent to Spence while here. Whether
                 he says that he received it, or not, is irrelevant. He cannot
                 represent them. Please pass this to Ethics folks, though I
                 would be amazed, if they had not reached this conclusion
                 independently.
                                                           ENF BC 3
June 20, 2005 E-mail from Harold Degenhardt to                            , attached as Exhibit 172.

        On June 20, 2005, Cohen responded to Degenhardt’s e-mail:

                 I didn’t discuss Stanford with Spence. Anyway, I agree
                 with your assessment Hal; even if Spence doesn’t recall
                 reading it, as preoccupied as he was at the time, it may have
                 simply slipped his memory. And optically, it would look
                 very bad.

June 20, 2005 E-mail from Jeffrey Cohen to Harold Degenhardt, attached as Exhibit 172.

        Connor then determined, based on the information he received from the Fort
Worth staff, including Prescott, that Barasch could not represent Stanford on the basis of
his attendance at a meeting with regulators in the district at which complaints about a
Ponzi scheme at Stanford were discussed. Connor Testimony Tr. at 16-18. Connor
stated, “. . . [U]pon learning more information from the staff in Fort Worth, we made the
determination that Spence Barasch had participated in the Stanford matter and that he
could not participate in these post-employment activities.” Id. at 16. 105

       On June 20, 2005, at 7:14 p.m., Alvarado e-mailed Robert Allen Stanford and
Suarez about the news that Barasch could not represent Stanford:

                 As you know, per your instructions, I was in the process of
                 retaining the legal services of Spencer Barasch, the former
104
     When interviewed by the OIG, Degenhardt did not recall this e-mail, but noted that Barasch would
have been prevented from working on any Stanford matter that his group had worked on. Degenhardt
Interview Memorandum at 6.
105
     Connor explained that Barasch’s actions in attending a meeting at which it was discussed whether
Stanford was a Ponzi scheme “would constitute participation, and that matter, whether it had been assigned
a particular number or not, would be considered a continuation of . . . whatever the Fort Worth number that
was assigned to it that ultimately became the Enforcement investigation. So it would be the issues, the
parties are all the same, and so that initial participation would continue right on up until a formal
investigation was opened and a Fort Worth number was assigned to it.” Connor Testimony Tr. at 20.


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                  head of enforcement of the Dallas SEC office, currently
                  with Andrews and Kurth. However, he called me today to
                  inform me that he was unable to assist us in the referenced
                  matter as he was conflicted out. It appears that he did not
                  receive the okay from the office of the General Counsel of
                  the SEC, as the matter started before he left the SEC. He
                  left the SEC six weeks ago. Thus, we are not able to retain
                  his services. Thanks.

 June 20, 2005 E-mail from Mauricio Alvarado to Robert Allen Stanford, attached as
 Exhibit 173. On July 2, 2005, Robert Allen Stanford reacted strongly to the news,
 stating, “This is bs and I want to know why the SEC would /could conflict him out.” July
 2, 2005 E-mail from Robert Allen Stanford to Mauricio Alvarado, attached as Exhibit
 173.

          We note that apart from Barasch’s involvement in Stanford matters while he was
 at the FWDO, at the time Barasch sought to represent Stanford in June 2005, he was
 prohibited by the federal conflict-of interest statutes from communicating to or appearing
 before the SEC on any matter until April 13, 2006, one year after his departure. 106
 During his OIG interview, Barasch stated that he did not recall having contacted the SEC
 in 2005 about representing Stanford, but did acknowledge he was subject to the one-year
 ban. Barasch Interview Tr. at 53-54. In fact, when the OIG first asked Barasch about his
 effort to represent Stanford in 2005, his immediate response was as follows:

                  2005 I had my one-year ban. Okay. I had a one-year
                  ethical ban, because I was an SES or [Senior Officer], or
                  whatever they’re called. So I couldn’t practice before the
                  Commission for a year.

Id. at 53.




 106
      18 U.S.C. § 207(c)(1) prohibits certain senior government officials from “knowingly mak[ing], with
 the intent to influence, any communication to or appearance before any officer or employee of the
 department or agency in which such person served within 1 year before” termination from senior service, if
 that communication or appearance is made “on behalf of any other person (except the United States), in
 connection with any matter on which such person seeks official action by any officer of employee of such
 department or agency . . . .” See also 5 C.F.R. § 2641.204; 17 C.F.R. § 200.735-8(a)(4). This one-year ban
 is not in any way limited to matters in which the former employee participated as a government employee;
 rather, it is “a one year across the board” prohibition on appearing before the individual’s former agency.
 Connor Testimony Tr. at 36-37. Connor confirmed that Barasch was subject to the one-year ban. Id. at 37.


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        B.       In September 2006, Stanford Retained Barasch to Represent it in
                 Connection With the SEC’s Investigation of Stanford, and Barasch
                 Performed Legal Work on Behalf of Stanford

        Approximately one year after the SEC’s Ethics Office determined that Barasch’s
conflicts, not the one-year ban, prevented him from representing Stanford in connection
with the SEC investigation, Stanford retained Barasch to do just that. On September 29,
2006, Robert Allen Stanford e-mailed Alvarado and James Davis, SIB’s Chief Financial
Officer, the following:

                 The former sec [D]allas lawyer we spoke about in [S]t
                 [C]roix. Get him on board asap.

September 29, 2006 E-mail from Robert Allen Stanford to Mauricio Alvarado, attached
as Exhibit 174. Alvarado responded to Robert Allen Stanford approximately one hour
later:

                 I have already spoken to Spencer Barasch. I have
                 scheduled a meeting for next Tuesday in Miami in the
                 afternoon. For your information, Spencer is a partner at
                 Andrews Kurth and was previously the Associate Director
                 in the SEC’s Fort Worth office where he headed up the
                 agency’s enforcement program in the Southwest.

September 29, 2006 E-mail from Mauricio Alvardo to Robert Allen Stanford, attached as
Exhibit 174.

        Also on September 29, 2006, Barasch e-mailed Alvarado:

                 Thanks for the call this morning – I look forward to the
                 opportunity to be of service to Stanford going forward.

                 I will await instructions about where and when to meet in
                 Miami on [T]uesday. . . .

September 29, 2006 E-mail from Spencer Barasch to Mauricio Alvarado, attached as
Exhibit 175. On Monday, October 2, 2006, Alvarado notified Robert Allen Stanford and
Davis, “Fyi. I will be meeting with Spencer Barasch, former SEChead [sic] of
enforcement tomorrow at 3:00 PM at our offices in Miami (21st floor conference room).”
October 2, 2006 E-mail from Mauricio Alvarado to James Davis and Robert Allen
Stanford, attached as Exhibit 175.

       On October 3, 2006, Barasch met with Alvarado in Stanford’s Miami office. See
Andrews Kurth billing records, attached as Exhibit 176; Barasch Interview Tr. at 52-53,
55-57. Barasch told the OIG that, after sitting in the lobby of the Miami office for “over

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an hour,” he met with Alvarado “for 15 minutes, and all [Alvarado] did was hand[] [him]
a stack of Stanford promotional documents . . . .” Barasch Interview Tr. at 56. Barasch
billed 4.5 hours for the meeting and preparation for the meeting which, according to his
billing records, did not include time related to travel or review of publicly available
company information to prepare on the day before for the meeting. See Exhibit 176.

       On October 4, 2006, the day after the meeting in Miami, Barasch followed up
with Alvarado by e-mail as follows:

                 I enjoyed finally meeting you yesterday. Some follow-up
                 thoughts/questions?

                 (1) Any more news from the SEC or from Antigua? Did
                 you actually make the trip to Antigua this morning?

                 (2) How is the progress on the response to the NASD? . . .

October 4, 2006 E-mail from Spencer Barasch to Mauricio Alvarado, attached as Exhibit
177.

        Alvarado responded to Barasch’s e-mail, stating:

                 Likewise, I am very glad that we finally met. Responding
                 to your questions, we have not heard anything else from the
                 SEC today. We are nonetheless, working on the draft
                 response to the NASD. . . .

                 As soon as I get back to Houston [from Antigua], I will
                 give you a call to discuss further, and plan a strategy to
                 follow.

                 I am glad that you are now part of our team. I look forward
                 to our working together.

October 5, 2006 E-mail from Mauricio Alvarado to Spencer Barasch, attached as Exhibit
177. Barasch billed 6.5 hours to Stanford on October 4, 2006, for return travel from
Miami and “review [of] documentation received from company about SEC and NASD
inquiries.” Exhibit 176.

        On October 12, 2006, Barasch billed Stanford 0.7 hours for, inter alia, a
“[t]elephone conference with Mauricio Alvarado regarding status of SEC and NASD
matters.” Id. On October 12, 2006, Alvarado e-mailed Barasch and Thomas Sjoblom, a




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partner at Proskauer Rose LLP who represented Stanford on the SEC’s investigation, the
following regarding the “NASD CD Inquiry,” as follows:

                 Spence/Tom,

                 Per our conversation, I am attaching for your review our
                 proposed response to the latest NASD letter dated
                 September 27, 2006. Please review it and send me your
                 comments, if any, by the end of the day tomorrow. . . .

October 12, 2006 E-mail from Mauricio Alvarado to Spencer Barasch and Thomas
Sjoblom, attached as Exhibit 178.

       Barasch responded to Alvarado’s request for comments the next day, October 13,
2006, stating:

                 As much as I would like to offer you some brilliant
                 suggestions, and show off my wisdom, I have nothing of
                 substance to add. I think the content of the response, and
                 its tone, are excellent.

                 I suspect that the NASD will just go through the motions to
                 satisfy the SEC.

October 13, 2006 E-mail from Spencer Barasch to Mauricio Alvarado, attached as
Exhibit 179. Alvarado forwarded Barasch’s comments to Robert Allen Stanford on
October 13, 2006, with the introduction, “FYI. This is the feedback from the former SEC
person in Fort Worth in relation to our proposed draft letter to the NASD.” October 13,
2006 E-mail from Mauricio Alvarado to Robert Allen Stanford, attached as Exhibit 180.

          In his SEC interview, Barasch told the OIG that Alvarado had asked him to
review a draft letter to the NASD, but that he had only “looked at it for two minutes.”
Barasch Interview Tr. at 59. Barasch stated that he wrote him back and said “something
like . . . , ‘Hey, as much as I’d like to tell you I have pearls of wisdom, I have nothing to
add.’” Id. Barasch said that his two-minute review of the draft letter “was the extent of
[his] involvement with Stanford.” Id. at 59-60. 107

      On October 16, 2006, Barasch e-mailed Bernerd Young, SGC’s Chief
Compliance Officer, stating, “Get back to me on dates for Antigua – if not too far out,

107
     In fact, as demonstrated in this section of the report, the OIG found evidence that, in addition to
reviewing the draft letter to the NASD, Barasch had met with Stanford General Counsel Alvarado,
reviewed documentation received from the company, and participated in conference calls with Alvarado,
and in connection with this work billed a total of approximately 12 hours to Stanford.


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week of November 13th would be great.” October 16, 2006 E-mail from Spencer Barasch
to Bernerd Young, attached as Exhibit 181. In response, Young e-mailed a Stanford
employee the same day as follows:

                 I was speaking to Mauricio [Alvarado] at the Jean Gilstrap
                 awards Friday night and he would like me to bring our
                 outside counsel, Spencer Barasch to visit the Bank.
                 Mauricio would like this done in the next few months if
                 possible. Please send me your availability through the end
                 of the year, I will coordinate with Mr. Barasch and then
                 coordinate with your staff.

October 16, 2006 E-mail from Bernerd Young to Juan Rodriguez-Tolentino, attached as
Exhibit 182. Four days later, on October 20, 2006, Young e-mailed another Stanford
employee to arrange for Barasch’s visit as follows:

                 As you can see below, I have been requested by Mauricio
                 Alvarado to bring our securities outside counsel to view
                 your fine facilities. On Tuesday, Mauricio again requested
                 (in Mr. Stanford’s presence no less) that this meeting be
                 accomplished ASAP.

                 If you or Juan can provide me with a couple of available
                 dates, I will run it by Mr. Barasch and let you know.

                 If you are not the right person, I apologize, and please point
                 me in the right direction.

October 20, 2006 E-mail from Bernerd Young to Stanford Empl 7                    , attached as Exhibit
183.

        On October 26, 2006, the Commission issued a formal order of investigation in
the Stanford matter. Exhibit 148. On November 20, 2006, the SEC staff had a
conference call with Sjoblom. See November 21, 2006 E-mail from Spencer Barasch to
Mauricio Alvarado, attached as Exhibit 184. The next day, November 21, 2006, at 11:07
a.m., Stanford counsel Sjoblom sent Alvarado an e-mail with the subject “Spencer
Barasch.” November 21, 2006 E-mail from Thomas Sjoblom to Mauricio Alvarado,
attached as Exhibit 185. Sjoblom’s e-mail stated:

                 . . . [D]o you have Spencer’s phone number and name of
                 his law firm. I am sending the letter to the SEC requesting
                 formal order. So that I get the formal order, I need to also
                 tell them that I will accept service, but will not be back
                 until late next week. So, don’t send subpoenas until then.


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Id. Approximately one hour later, at 12:20 p.m., Alvarado sent Sjoblom the requested
contact information for Barasch. November 21, 2006 E-mail from Mauricio Alvarado to
Thomas Sjoblom, attached as Exhibit 185.

       An e-mail sent later that day, at 2:57 p.m., from Barasch to Alvarado suggests that
Barasch and Sjoblom may have discussed the SEC investigation after Sjoblom received
Barasch’s contact information. In that e-mail, Barasch stated:

                  Would you ask Tom [Sjoblom] if he recalls who the other
                  SEC person was that called him yesterday? [M]ay be
                  somebody I know well and can call for info.

Exhibit 184 (emphasis added). Alvarado responded a few minutes later, “He told me that
the call was from ENF Staff Atty 5 and the new Chief.” November 21, 2006 E-mail from
Mauricio Alvarado to Spencer Barasch, attached as Exhibit 184. Barasch replied, “‘New
chief’ could mean a number of people -- if he has the name, it would help. [I]f not, no big
deal.” Exhibit 184. Alvarado then asked Sjoblom, “What are the names of the SEC folks
who called you yesterday?” November 21, 2006 E-mail from Mauricio Alvarado to
Thomas Sjoblom, attached as Exhibit 186. Alvarado e-mailed Barasch, “He did not get
the name.” November 21, 2006 E-mail from Mauricio Alvarado to Spencer Barasch,
attached as Exhibit 184. 108

               On or about November 27, 2006, Barasch spoke with Cohen about Stanford. See
  November 27, 2006 E-mail from Spencer Barasch to Jeffrey Cohen, attached as Exhibit
  187. Barasch told the OIG that he had called and talked toENF Staff Atty or left a voice-mail for
                                                               5
ENF Staff Atty
5              and Cohen called him back. Barasch Interview Tr. at 64. Barasch said he knew
  he “talked to [Cohen.]” Id. Barasch stated that Cohen asked him during the
  conversation, “Spence, can you work on this?” Id. According to Barasch, Cohen told
  him, “. . . I’m not sure you’re able to work on this[,]” and Barasch replied, “I’m already
  talking to Rick Connor about it.” Id. Cohen testified that Barasch may have called him,
  but that he did not remember any “specifics” of the conversation, although he said he
  thought that he remembered talking to Barasch “about the prospects of his getting
  involved in the case . . . .” Cohen Testimony Tr. at 111-112.109

108
     Barasch’s Stanford billing records do not have an entry for November 21, 2006. See Exhibit 176. The
last date in November 2006 that Barasch billed time to the Stanford account was November 13, 2006. Id.
On November 13, 2006, Barasch billed Stanford 0.3 hours for a “[t]elephone conference with Mauricio
Alvarado regarding status of SEC and NASD inquiries.” Id.
109
     If Barasch did, in fact, discuss the substance of the SEC’s investigation of Stanford in the telephone
call with Cohen, Barasch could have made a communication to his former agency with intent to influence
in violation of 18 U.S.C. § 207(a)(1). Under 5 C.F.R. 2641.201(d), “[a] former employee makes a
communication when he imparts or transmits information of any kind, including facts, opinions, ideas,
questions or direction, to an employee of the United States, whether orally, in written correspondence, by
electronic media, or by any other means.” A communication “is made with the intent to influence when
made for the purpose of… (ii) Affecting government action in connection with an issue or aspect of a
          (Footnote continued on next page.)

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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


         C.       In Late November 2006, After He Had Already Performed Legal
                  Work on Stanford’s Behalf, Barasch For the Second Time Sought
                  SEC Approval to Represent Stanford and Was Again Told He Could
                  Not Do So

       On November 27, 2006, Barasch belatedly sought permission from the SEC’s
Ethics Office to represent Stanford. See November 27, 2006 E-mail from Spencer
Barasch to Jeffrey Cohen, copying Richard Connor, attached as Exhibit 187. On
November 27, 2006, Barasch e-mailed Cohen the following:

                  Jeff –

                  FYI, I just talked to Rick Connor in the GCs office and
                  shared with him our conversation about Stanford -- I am
                  sure he will be following up with you soon.
                                                                  ENF Staff
Id. 110 Also on November 27, 2006, Preuitt e-mailed Atty 5                     :
                              nd
                  March 22 2005 -- the last summit meeting that Spence
                  attended. It was in Austin and Victoria made a presentation
                  regarding Stanford. I cannot find my notes, but I would
                  swear in court that he was in attendance at that meeting and
                  that Victoria discussed Stanford. He was familiar enough
                  with the issue that he was negative on the case and the idea
                  that we would ever be able to do anything about Stanford
                  during the meeting. Victoria will be back tomorrow and
                  she may have notes regarding the specifics of what she
                  discussed regarding Stanford. Spence was very aware of
                  the firm and its activities, but some of that may have been
                  from our earlier attempt to get enforcement to take action
                  against the firm in either 1997 or 1998. I will look to see if
                  Spence was e-mailed the Stanford report and referral
                  memo. I’m not certain he ever saw that because it was
                  given to ENF Asst to discuss with us.[111]
                           Dir 1




matter which involves an appreciable element of actual or potential dispute or controversy.” 5 C.F.R.
§ 2641.201(e). However, we found no specific evidence that such a violation occurred.
110
    As discussed above, Barasch had already been denied permission from the SEC’s Ethics Office to
represent Stanford in the SEC investigation in June 2005.
111                                                                ENF Staff                                ENF Asst
    Five minutes after sending this e-mail, Preuitt forwarded to Atty 5        her April 5, 2005 e-mail to Dir 1
with the referral memorandum and stated:
         The e-mail below suggests strongly that Spence had not looked at the memo. I really
         don’t think that he did.
         (Footnote continued on next page.)

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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.




November 27, 2006 E-mail from Julie Preuitt to ENF Staff Atty 5                , attached as Exhibit
189. 112

       On December 13, 2006, Prescott e-mailed Connor and copied Preuitt the
following:

                  I have been out of the office, and this morning received
                  your voice mail inquiry about the location of the meeting in
                  which Stanford was discussed as a possible enforcement
                  matter. My recollection is that this was at one of the
                  meetings among regulators in our district that occurs
                  quarterly, and that this particular meeting was in Austin,
                  Texas.

December 13, 2006 E-mail from Victoria Prescott to Richard Connor, attached as Exhibit
190. Preuitt responded to Prescott, stating:

                  I gave him the same information yesterday. Spence had
                  told them that he didn’t recall the meeting and wanted to
                  know where it was held.

December 13, 2006 E-mail from Julie Preuitt to Victoria Prescott, attached as Exhibit
191.

        Sometime after Connor was reminded by Preuitt and Prescott about Barasch’s
prior involvement in the Stanford matter, Connor called Barasch and told him that he
could not represent Stanford on the SEC investigation and made reference to Barasch’s
attendance at Prescott’s presentation during the March 2005 meeting of regulators.
Barasch Interview Tr. at 58; see also Connor Testimony Tr. at 16. Barasch told the OIG
that he asked Connor to reconsider as follows:

                  . . . [S]o I said, “Rick, if that’s the sole basis for me to
                  hav[e] a conflict on this, I have to tell you, one I don’t
                  remember it. Two, the discussions at these meetings, these
                  roundtables, are so superficial, and at such a high level, you

         I don’t know that discussions at a meeting about a situation he was already familiar with
         would preclude him or not.
                                                 ENF Staff Atty 5
November 27, 2006 E-mail from Julie Preuitt to                      attached as Exhibit 188.
112
    Preuitt testified that the SEC Ethics Office requested information about how much involvement
Barasch had with SEC investigations of Stanford while he was with the SEC, and she “specifically referred
them to . . . a summit meeting with the other regulators in the district,” at which they discussed Stanford at
length. Preuitt December 14, 2009 Testimony Tr. at 77-78.


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                  know, I can’t imagine that anything of any significance
                  there would have been [discussed].” I said, “Would you
                  please reconsider[?]” I needed the work. But I wanted it to
                  be ethical work.

Barasch Interview Tr. at 58-59. Barasch stated that Connor called him back again and
told him that he could not represent Stanford on the SEC investigation, and that Barasch
then called Alvarado and relayed that decision. Id. at 59-60.

        Barasch further told the OIG that when Connor informed him that he was
prohibited from working on the Stanford investigation, Barasch “had done absolutely
nothing to that point,” and that Alvarado had not yet asked him to do anything. Id. at 59.
Barasch told the OIG that, as discussed above, what he described as a two-minute review
of a draft letter to the NASD “was the extent of [his] involvement with Stanford.” Id. at
59-60. 113 As shown above, by the time he contacted Connor on November 27, 2006,
Barasch had already met with Stanford’s General Counsel, participated in telephone
conferences with him and reviewed pertinent documentation, resulting in billings to
Stanford of approximately 12 hours. See Exhibit 176.

        It appears to the OIG that Barasch’s representation of Stanford may have violated
the District of Columbia and Texas Bar rules of professional conduct. 114 As discussed
above, the DC Bar’s Rules of Professional Conduct state that “[a] lawyer shall not accept
other employment in connection with a matter which is the same as, or substantially
related to, a matter in which the lawyer participated personally and substantially as a
public officer or employee.” District of Columbia Rule of Professional Conduct 1.11
(emphasis added). See Exhibit 48. 115 The Texas Disciplinary Rules of Professional
Conduct state that “a lawyer shall not represent a private client in connection with a
matter in which the lawyer participated personally and substantially as a public officer or

113
    Barasch told the OIG that Alvarado had set up a phone call with Sjoblom and him “to talk about the
case, “but he was in Dubai on a case and couldn’t make the call.” Barasch Interview Tr. at 59. So,
according to Barasch, they “never had the call.” Id. Sjoblom sent an e-mail to Barasch and Alvarado on
December 6, 2006, containing dialing instructions for a conference call. December 6, 2006 E-mail from
Thomas Sjoblom to Spencer Barasch and Mauricio Alvarado, attached as Exhibit 192. Barasch replied,
“What day? I am in [D]ubai through [F]riday,” and Alvarez responded, “Please call me when you come
back.” Id.
114
    Barasch is admitted to practice law in both the District of Columbia and the State of Texas. See
Barasch biography, attached as Exhibit 193.
115
     The inquiry under Rule 1.11 “is a practical one asking whether the two matters substantially overlap.”
In re Sofaer, 728 A.2d 625, 628 (D.C. 1999)(footnote omitted). The D.C. Court of Appeals noted as
follows regarding the language of Rule 1.11: “By announcing an approach that deems transactions
substantially related if the former government attorney may have had access to any information that could
be useful – not just legally relevant – in the later transaction . . . we have broadened the scope of the
substantially related test for revolving door purposes.” Brown v. District of Columbia Board of Zoning
Adjustment, 486 A.2d 37 (D.C. 1984)(quotations and parenthetical omitted).


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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
Recipients of this report should not disseminate or copy it without the Inspector General’s approval.


employee, unless the appropriate government agency consents after consultation.” See
Exhibit 47. 116 Accordingly, the OIG is referring this Report of Investigation to the
Commission’s Ethics Counsel for referral to the Office of Bar Counsel for the District of
Columbia and the Chief Disciplinary Counsel for the State Bar of Texas.

         D.       Immediately After the SEC Sued Stanford on February 17, 2009,
                  Barasch Again Sought to Represent Stanford, This Time in the
                  Litigation

        Despite having had significant responsibility for delaying the initiation of an SEC
investigation into Stanford’s Ponzi scheme for seven years and having been advised by
the SEC’s Ethics Office on two separate occasions that he could not represent Stanford in
connection with the SEC’s investigation, on the very day that the SEC filed its action
against Stanford, Barasch contacted the SEC’s Ethics Office a third time in an effort to
represent Stanford.

         On February 17, 2009, Barasch sent an e-mail to Connor, stating:

                  I hope this e-mail finds you well and that you are surviving
                  all the turmoil on Wall Street.

                  I have a conflict related question [f]or you, where time is of
                  the essence. It involves the Stanford matter filed by the
                  Fort Worth office today that has been all over the news.

                  Would you please call me the first chance you get: if I am
                  not in my office you can try my cell anytime, . . . .

February 17, 2009 E-mail from Spencer Barasch to Richard Connor, attached as Exhibit
194.

       Connor stated that he could not recall another occasion on which a former SEC
employee contacted his office on three separate occasions trying to represent a client in
the same matter. Connor Testimony Tr. at 27.
116
     In contrast to the Texas and District of Columbia rules of professional conduct, with the exception of
the one-year ban, federal conflicts-of-interest statutes do not per se prohibit a former SEC employee from
representing a party in connection with a matter in which he or she participated while employed at the SEC.
Instead, the federal statutes impose a narrower ban on former government employees against knowingly
make a communication or appearance before an officer or employee of a federal agency or court on behalf
of another person in connection with a particular matter (A) in which the United States is a party or has a
direct and substantial interest, (B) in which the person participated personally and substantially as an
officer or employee, and (C) which involved a specific party or parties at the time of the participation. 18
U.S.C. § 207(a)(1). “Behind-the-scenes assistance” is not prohibited, “provided that the assistance does not
involve a communication to or an appearance before an employee of the United States.” 5 C.F.R. §
2641.201(d)(3).


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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
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        Connor testified:

                 [I]t struck me as unusual that [Barasch] would be coming
                 back for a matter that obviously he would have known that
                 he had been told he couldn’t participate in the matter . . .
                 on two [previous] occasions.

Id. at 44-45.

       Barasch described the circumstances of his third request to represent Stanford as
follows:

                 2009 the whole thing[] blows up. Every lawyer in Texas
                 and beyond is going to get rich over this case. Okay? And
                 I hated being on the sidelines. And I was contacted right
                 and left by people [to] represent them.

Barasch Interview Tr. at 61. 117

       On February 19, 2009, Prescott e-mailed Connor, “I tried to return your call last
evening, but missed you. Since then, I found an old e-mail that I think pertains to the
question being raised. I will forward it to you.” See February 19, 2009 E-mail from
Victoria Prescott to Richard Connor, attached as Exhibit 195. Prescott then forwarded to
Connor the e-mail she had sent him on December 13, 2006, in connection with the last
time Barasch had sought clearance to represent Stanford. February 19, 2009 E-mail from
Victoria Prescott to Richard Connor, attached as Exhibit 196. Connor replied to Prescott,
“Thanks for your help. This is all we need for now.” February 19, 2009 E-mail from
Richard Connor to Victoria Prescott, attached as Exhibit 196

        Connor testified that “. . . Barasch was upset with [the Ethics Office’s] decision
[that he could not represent Stanford]. . . . He . . . strongly argued that the matter
currently in 2009 was new and was different and unrelated to the matter that had occurred
before he left.” Connor Testimony Tr. at 27. In a February 23, 2009 e-mail to Connor,
Barasch disagreed with the SEC’s position that he could not represent Stanford in the
SEC litigation because of his past involvement in the SEC matter. See February 23, 2009
E-mail from Spencer Barasch to Richard Connor, attached as Exhibit 197. Barasch cited
statements in the press by Stephen Korotash, Associate Regional Director of the FWDO
Enforcement group, that “[t]he current S.E.C. charges stem from an inquiry opened in




117
   Barasch explained that “this [was] four years after he left the Commission” and he did not think “this
would be a matter that would still be lingering…” Barasch Interview Tr. at 61.


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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
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October 2006 after a routine examination of Stanford Group” 118 in support of his
argument as follows:

                  Please review the information noted below, and then I
                  would like to talk with you as soon as reasonably possible.
                  With all due respect to the persons with whom you are
                  dealing in the FWDO, I don’t think they have their facts
                  and information correct. I left the Commission on April 15,
                  2005, more than one year before the SEC’s Associate
                  Director in charge of “this matter” has publicly
                  acknowledged that “this matter” arose. (although irrelevant
                  here, I reiterate that to the extent that there was a “prior
                  matter,” I had no involvement in it, either).

                  Rick, the Commission seems to be taking a different
                  position on the date of “this matter” with me than it appears
                  to be taking publicly. Maybe I am missing something, but
                  it seems pretty self-evident to me that there is no conflict in
                  this matter. I have copied my firm’s General Counsel, who
                  is in agreement with me.

Id.

        In his OIG interview, Barasch described the basis for his belief at the time that the
SEC action must have been unrelated to any matters that he had been involved with while
at the SEC, as follows:

                  . . . I said, “Hey, Rick. This is a new matter. I’d like to
                  work on it. I don’t know how or what, yet, but I’m getting
                  lots and lots of calls.” . . . And then somewhere right about
                  that time, right then the staff is getting slammed in Fort
                  Worth for, you know, why did it take so long. And the
                  question was when did this thing start. When did this
                  matter start, and Steven Korotash . . . [was] quoted in the
                  “Journal” and the “Times.” “This matter didn’t start until
                  2006.” There’s a quote. . . . So I send [the articles] to
                  Rick, and I go, “Hey, here’s my proof, and this is a new
                  matter. It’s right there.” Steve [Korotash] says, “This

118
     See Clifford Krauss, Phillip L. Zweig and Julie Creswell, Texas Firm Accused of $8 Billion Fraud, The
New York Times, February 17, 2009, attached as Exhibit 198. Barasch also cited a Wall Street Journal
article in support of his argument that he did not have a conflict representing Stanford in the SEC litigation.
See Glenn R. Simpson, Dionne Searcey and Kara Scannell, Madoff Case Led SEC to Intensify Stanford
Probe, Wall Street Journal, February 19, 2009, attached as Exhibit 199.


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                    matter started in ‘06.” That was a year after I left. So the
                    way I see it, I could work on it.

Barasch Interview Tr. at 61-62. Barasch told the OIG that Connor called him and
responded:

                    . . . I don’t remember the words he used, but it was
                    something along the lines that Steven misspoke. . . . And
                    that the matter really did go back before that . . . . So what
                    was left out there in the press was ‘06, but he was telling
                    me it was something earlier, and I wasn’t going to argue
                    with him. I didn’t want to embarrass his staff or Steve, or
                    anything, so I just absolutely dropped it.

Id. at 62-63. 119

         Subsequently, on March 9, 2009, Barasch e-mailed Connor as follows:

                    Based on our last conversation on this issue, it is my
                    understanding that the Commission’s position is that I have
                    a conflict and should not participate in “the SEC matter” in
                    which I allegedly participated back in 2005. To the extent
                    that my firm participates in “that SEC matter,” I will be
                    walled off …. I am writing to let you know that I am
                    intending to participate, on behalf of one or more former
                    Stanford employees (who, by the way, joined Stanford after
                    2005), in different matters, specifically private litigation
                    and/or regulatory inquiries by a State securities regulator.
                    Please advise asap if you believe that this presents any
                    issues.

March 9, 2009 E-mail from Spencer Barasch to Richard Connor, attached as Exhibit 200.



119
     Connor disagreed with Barasch’s position that the matter began in 2006, testifying as to his perspective
as follows:
         [T]he matter did not start in 2006, and I don’t know exactly what the basis was for
         [Korotash] to say that it did. But from our perspective, from the ethics perspective, the
         matter had clearly started long before that. It had started back when Mr. Barasch was
         here, and it was a continuation of the same matter. It was a matter involving, among
         other things, a Ponzi scheme by Stanford, and that . . . matter had started much earlier
         and had continued as the same matter right up to the time we were talking.
Connor Testimony Tr. at 26.


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Connor responded:

                 Your participation in the other Stanford matters does not
                 violate the post-employment laws. Your prohibition
                 applies only to appearing before or communicating with the
                 federal government in connection with the same matter that
                 you participated in while at the SEC.

March 10, 2009 E-mail from Richard Connor to Spencer Barasch, attached as Exhibit
200.


                                           CONCLUSION

         The OIG investigation found that the SEC’s Fort Worth office was aware since
1997 that Robert Allen Stanford was likely operating a Ponzi scheme, having come to
that conclusion a mere two years after SGC, Stanford’s investment adviser, registered
with the SEC in 1995. We found that over the next eight years, the SEC’s Fort Worth
Examination group conducted four examinations of Stanford’s operations, finding in each
examination that its sale of CDs through SIB could not have been “legitimate,” and that it
was “highly unlikely” that the returns Stanford claimed to generate could have been
achieved with its purported conservative investment approach. While the Fort Worth
Examination group made multiple efforts after each examination to convince
Enforcement to open and conduct an investigation of Stanford, no meaningful effort was
made by Enforcement to investigate the potential fraud, or to bring an action to attempt to
stop it, until late 2005.

         Moreover, the OIG investigation found that even at that time, Enforcement
missed an opportunity to bring an action against SGC for its admitted failure to conduct
any due diligence regarding Stanford’s investment portfolio, which could have
potentially completely stopped the sales of the SIB CDs through the SGC investment
adviser, and provided investors and prospective investors notice that the SEC considered
SGC’s sales of the CDs to be fraudulent. The OIG investigation found that this particular
type of action was not considered, partially because the new head of Enforcement in Fort
Worth was not apprised of the findings in the investment advisers’ examinations in 1998
and 2002, or even that SGC had registered as an investment adviser, a fact she learned for
the first time in the course of this OIG investigation in January 2010.

        The OIG did not find that the reluctance on the part of the SEC’s Fort Worth
Enforcement group to investigate or recommend an action against Stanford was related to
any improper professional, social or financial relationship on the part of any former or
current SEC employee. We found evidence, however, that SEC-wide institutional
influence within Enforcement did factor into the repeated decisions not to undertake a
full and thorough investigation of Stanford, notwithstanding staff awareness that the
potential fraud was growing. We found that senior Fort Worth officials perceived that

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disclosure to third parties. No redaction has been performed by the Office of Inspector General.
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they were being judged on the numbers of cases they brought, so-called “stats,” and
communicated to the Enforcement staff that novel or complex cases were disfavored. As
a result, cases like Stanford, which were not considered “quick-hit” or “slam-dunk”
cases, were not encouraged.

        The OIG’s findings during this investigation raise significant concerns about how
decisions were made within the SEC’s Division of Enforcement with regard to the
Stanford matter. We are providing this Report of Investigation (“ROI”) to the Chairman
of the SEC with the recommendation that the Chairman carefully review its findings and
share with Enforcement management the portions of this ROI that relate to the
performance failures by those employees who still work at the SEC, so that appropriate
action (which may include performance-based action, if applicable) is taken, on an
employee-by-employee basis, to ensure that future decisions about when to open an
investigation and when to recommend that the Commission take action are made in a
more appropriate manner.

       The OIG is also recommending that the Chairman and the Director of
Enforcement give consideration to promulgating and/or clarifying procedures with regard
to:

                 (1)  the consideration of the potential harm to investors if no action is
taken as a factor when deciding whether to bring an enforcement action, including
consideration of whether this factor, in certain situations, outweighs other factors such as
litigation risk;

                (2)     the significance of bringing cases that are difficult, but important
to the protection of investors, in evaluating the performance of an Enforcement staff
member or a regional office;

                (3)    the significance of the presence or absence of United States
investors in determining whether to open an investigation or bring an enforcement action
that otherwise meets jurisdictional requirements;

                (4)     coordination between the Enforcement and OCIE on
investigations, particularly those investigations initiated by a referral to the Enforcement
by OCIE;

                 (5)    the factors determining when referral of a matter to state securities
regulators, in lieu of an SEC investigation, is appropriate;

              (6)     training of Enforcement staff to strengthen their understanding of
the laws governing broker-dealers and investment advisers; and

               (7)     emphasizing the need to coordinate with the Office of International
Affairs and the Division of Risk, Strategy, and Financial Innovation, as appropriate, early

                                                  150
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               PII




OIG Staff 2
               PII

				
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